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<SEC-DOCUMENT>0001052045-04-000111.txt : 20040315
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<ACCEPTANCE-DATETIME>20040315162233
ACCESSION NUMBER: 0001052045-04-000111
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 19
CONFORMED PERIOD OF REPORT: 20040229
FILED AS OF DATE: 20040315
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SERVICEMASTER CO
CENTRAL INDEX KEY: 0001052045
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741]
IRS NUMBER: 363858106
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14762
FILM NUMBER: 04669818
BUSINESS ADDRESS:
STREET 1: 3250 LACEY ROAD, SUITE 600
CITY: DOWNERS GROVE
STATE: IL
ZIP: 60515
BUSINESS PHONE: 6306632700
MAIL ADDRESS:
STREET 1: 3250 LACEY ROAD, SUITE 600
CITY: DOWNERS GROVE
STATE: IL
ZIP: 60515
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k31504.txt
<DESCRIPTION>SERVICEMASTER 10-K
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________.
Commission File Number 1-14762
--------------------------
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3250 Lacey Road, Suite 600, Downers Grove, Illinois, 60515-1700
(Address of Principal Executive Offices, Zip Code)
(630) 663-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Common Stock New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
----
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
The aggregate market value of shares of common stock held by non-affiliates
of the registrant as of June 30, 2003 was $3,118,875,708.
The number of shares of the registrant's common stock outstanding as of
March 5, 2004 was 293,981,651.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the registrant's Annual Report to Shareholders for the
year ended December 31, 2003 are incorporated into Part I and Part II of this
Form 10-K.
Certain parts of the registrant's Proxy Statement for the 2004 Annual
Meeting of Shareholders are incorporated into Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
Item 1. Business.............................................................................. 4
Item 2. Properties............................................................................ 10
Item 3. Legal Proceedings..................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 12
Item 6. Selected Financial Data............................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 12
Item 8. Financial Statements and Supplementary Data........................................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12
Item 9A. Controls and Procedures.............................................................. 13
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 14
Item 11. Executive Compensation................................................................ 16
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 16
Item 13. Certain Relationships and Related Transactions........................................ 16
Item 14. Principal Accounting Fees and Services................................................ 16
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 17
Signatures...................................................................................... 21
Exhibit Index................................................................................... 23
</TABLE>
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-K contains or incorporates by reference statements concerning
future results and other matters that may be deemed to be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The ServiceMaster Company ("ServiceMaster") intends that these
forward-looking statements, which look forward in time and include everything
other than historical information, be subject to the safe harbors created by
that legislation. ServiceMaster notes that these forward-looking statements
involve risks and uncertainties that could affect its results of operations,
financial condition or cash flows. Factors that could cause actual results to
differ materially from those expressed or implied in a forward-looking statement
include the following, among others:
<TABLE>
<S> <C>
o weather conditions that affect the demand for ServiceMaster's services;
o competition in the markets served by ServiceMaster;
o labor shortages or increases in wage rates;
o unexpected increases in operating costs, such as higher insurance, self-insurance and healthcare costs;
o higher fuel prices;
o increased governmental regulation including telemarketing;
o general economic conditions in the United States, especially as they may affect home sales or consumer
spending levels;
o time and expenses associated with integrating and winding down businesses; and
o other factors described from time to time in documents filed by ServiceMaster with the Securities and
Exchange Commission.
</TABLE>
PART I
ITEM 1. BUSINESS
ServiceMaster is a national service company serving both residential and
commercial customers. ServiceMaster's services include lawn care and landscape
maintenance; termite and pest control; home warranty and home inspection
services; plumbing, drain cleaning, heating, ventilation, air conditioning and
electrical services; and cleaning, disaster restoration and furniture repair.
These services are provided through a network of over 5,400 company-owned and
franchised locations operating under the following leading brands: TruGreen
ChemLawn, TruGreen LandCare, Terminix, American Home Shield, AmeriSpec, ARS
Service Express, Rescue Rooter, American Mechanical Services, Merry Maids,
ServiceMaster Clean and Furniture Medic. Incorporated in Delaware in 1991,
ServiceMaster is the successor to various entities dating back to 1947.
ServiceMaster is organized into five principal operating segments:
TruGreen; Terminix; American Home Shield; American Residential Services and
American Mechanical Services; and Other Operations. All ServiceMaster
subsidiaries are wholly owned, except for The Terminix International Company
L.P., in which Allied Bruce-Terminix Companies, Inc. is a Class B limited
partner. The financial information for each operating segment for 2001, 2002 and
2003 contained in the Notes to the Consolidated Financial Statements included in
ServiceMaster's Annual Report to Shareholders for the year ended December 31,
2003 ("Annual Report to Shareholders for 2003") is incorporated by reference in
this Form 10-K.
SERVICES
TruGreen Segment
The TruGreen segment provides lawn care services primarily under the
TruGreen ChemLawn brand name and landscape maintenance services primarily under
the TruGreen LandCare brand name, in each case, to residential and commercial
customers. Revenues derived from the TruGreen segment constituted 38%, 37% and
37% in 2003, 2002 and 2001, respectively, of the revenue from continuing
operations of the consolidated ServiceMaster enterprise. The TruGreen ChemLawn
and TruGreen LandCare businesses are seasonal in nature. Weather conditions,
such as a
4
<PAGE>
drought, affect the demand for lawn care and landscape maintenance
services and may result in a decrease in revenues or an increase in costs.
TruGreen ChemLawn. TruGreen ChemLawn is a leading provider of lawn care
services in the United States with approximately 3.5 million residential and
commercial customers. As of December 31, 2003, TruGreen ChemLawn provided these
services in 46 states and the District of Columbia through 205 company-owned
locations and 52 franchised locations. TruGreen ChemLawn also provides lawn care
services through a subsidiary in Canada and has entered into licensing
arrangements to provide these services in 10 other countries, primarily in the
Middle East.
TruGreen LandCare. TruGreen LandCare is a leading provider of landscape
maintenance services in the United States with approximately 13,000 residential
and commercial customers. As of December 31, 2003, TruGreen LandCare provided
these services in 39 states and the District of Columbia through 102
company-owned locations. TruGreen LandCare has no international operations.
Terminix Segment
The Terminix segment provides termite and pest control services primarily
under the Terminix brand name to residential and commercial customers. Revenues
derived from the Terminix segment constituted 26%, 26% and 24% in 2003, 2002 and
2001, respectively, of the revenue from continuing operations of the
consolidated ServiceMaster enterprise. The Terminix business is seasonal in
nature. The termite swarm season, which generally occurs in early spring but
varies by region depending on climate, has the highest demand for termite
control services and therefore the highest level of revenues. Similarly,
increased pest activity in the warmer months has the highest demand for pest
control services and therefore the highest level of revenues.
Terminix is a leading provider of termite and pest control services in the
United States with over 2.9 million residential and commercial customers. As of
December 31, 2003, Terminix provided these services in 45 states and the
District of Columbia through 332 company-owned locations and 138 franchised
locations. Terminix also provides termite and pest control services through a
subsidiary in Mexico and has entered into licensing arrangements to provide
these services in 27 other countries, primarily in the Caribbean and the Middle
East.
American Home Shield Segment
The American Home Shield segment provides home warranty contracts for
systems and appliances primarily under the American Home Shield brand name and
home inspection services primarily under the AmeriSpec brand name, in each case,
to residential customers. Revenues derived from the American Home Shield segment
constituted 13%, 12% and 11% in 2003, 2002 and 2001, respectively, of the
revenue from continuing operations of the consolidated ServiceMaster enterprise.
The American Home Shield and AmeriSpec businesses are seasonal in nature. Sales
volume in the American Home Shield segment depends, in part, on the number of
home resale closings which historically has been highest in the spring and
summer months. American Home Shield's costs related to service call volume is
highest in the summer months, especially during periods of unseasonably warm
temperatures.
American Home Shield. American Home Shield is a leading provider of home
warranty contracts for systems and appliances in the United States with over 1.1
million residential customers. It provides residential customers with contracts
to repair or replace electrical, plumbing, central heating and central air
conditioning systems, hot water heaters and appliances that breakdown due to
normal wear and tear and administers those contracts through independent repair
contractors. As of December 31, 2003, American Home Shield issued and
administered home warranty contracts in 49 states and the District of Columbia.
American Home Shield has entered into a licensing arrangement to provide these
services in Saudi Arabia.
AmeriSpec. AmeriSpec is a leading provider of home inspection services in
the United States with approximately 130,000 residential customers. As of
December 31, 2003, AmeriSpec provided these services in 46 states and the
District of Columbia through two company-owned locations and 228 franchised
locations. AmeriSpec has no international operations.
5
<PAGE>
American Residential Services and American Mechanical Services Segment
The American Residential Services and American Mechanical Services segment
provides plumbing, drain cleaning, heating, ventilation, air conditioning and
electrical services primarily under the ARS Service Express, American Mechanical
Services and Rescue Rooter brand names to residential and commercial customers.
Revenues derived from the American Residential Services and American Mechanical
Services segment constituted 19%, 21% and 24% in 2003, 2002 and 2001,
respectively, of the revenue from continuing operations of the consolidated
ServiceMaster enterprise. The American Residential Services and American
Mechanical Services businesses are seasonal in nature, with the greatest
activity occurring in May through August during the peak air conditioning
season.
American Residential Services. American Residential Services, which
includes the businesses of ARS Service Express and Rescue Rooter, is a leading
provider of plumbing, drain cleaning, heating, ventilation, air conditioning and
electrical services in the United States with approximately 1.4 million
residential customers. As of December 31, 2003, American Residential Services
provided these services in 24 states and the District of Columbia through 65
company-owned locations. American Residential Services has entered into a
licensing arrangement to provide plumbing and drain cleaning services under the
Rescue Rooter brand name in Saudi Arabia.
American Mechanical Services. American Mechanical Services, a subsidiary of
American Residential Services, is a leading provider of heating, ventilation,
air conditioning and electrical services in the United States with approximately
4,000 commercial customers. As of December 31, 2003, American Mechanical
Services provided these services in seven states and the District of Columbia
through 17 company-owned locations. American Mechanical Services has no
international operations.
Other Operations Segment
The Other Operations segment provides residential and commercial disaster
restoration and cleaning services primarily under the ServiceMaster and
ServiceMaster Clean brand names, domestic house cleaning services primarily
under the Merry Maids brand name and on-site furniture repair and restoration
services primarily under the Furniture Medic brand name. The Other Operations
segment also includes ServiceMaster's international operations and its
headquarters functions. Revenues derived from the Other Operations segment
constituted 4%, 4% and 5% in 2003, 2002 and 2001, respectively, of the revenue
from continuing operations of the consolidated ServiceMaster enterprise.
ServiceMaster Clean. ServiceMaster Clean is a leading franchisor in the
residential and commercial cleaning field in the United States with over 1
million customers. As of December 31, 2003, ServiceMaster Clean provided these
services in all 50 states and the District of Columbia through 3,040 franchised
locations. ServiceMaster Clean also provides disaster restoration and cleaning
services through subsidiaries in Ireland, the United Kingdom and Spain and has
entered into licensing arrangements to provide these services in 17 other
countries, primarily in Asia and the Middle East.
Merry Maids. Merry Maids is a leading provider of domestic house cleaning
services in the United States with approximately 300,000 customers. As of
December 31, 2003, these services were provided in 48 states and the District of
Columbia through 61 company-owned locations and 760 franchised locations. Merry
Maids also provides domestic house cleaning services through subsidiaries in
Denmark, Ireland and the United Kingdom and has entered into licensing
arrangements to provide these services in 10 other countries, primarily in Asia.
Furniture Medic. Furniture Medic is a leading provider of on-site furniture
repair and restoration services in the United States with approximately 130,000
residential customers. As of December 31, 2003, Furniture Medic provided these
services in 47 states and the District of Columbia through 425 franchised
locations. Furniture Medic also provides on-site furniture repair and
restoration services through a subsidiary in the United Kingdom and has entered
into licensing arrangements to provide these services in Canada, France and
Saudi Arabia.
6
<PAGE>
MARKETING AND DISTRIBUTION
ServiceMaster markets its services primarily through yellow pages
advertisements, telemarketing, television and radio advertising, print
advertisements, direct mail and door-to-door solicitation. Additionally,
American Home Shield markets its home service contracts through participating
real estate brokerage offices in conjunction with the resale of single-family
residences and through financial institutions and insurance agencies.
HEADQUARTER FUNCTIONS
The Business Support Center coordinates administration of payroll,
benefits, risk management, travel and certain procurement services for
ServiceMaster's internal operations. Various administrative support departments
also provide personnel, communications, marketing, government and public
relations, administrative, accounting, financial, tax, human resources,
information technology and legal services. The Business Support Center is
headquartered in Downers Grove, Illinois, and has additional personnel located
in Memphis, Tennessee.
PATENTS, TRADEMARKS AND LICENSES
ServiceMaster holds various service marks, trademarks and trade names that
it deems particularly important to the advertising and franchising activities
conducted by each of its operating segments. These marks are registered in the
United States and over 88 other countries and are renewed at each registration
expiration date.
FRANCHISES
Franchises are important to TruGreen ChemLawn, Terminix, ServiceMaster
Clean, Merry Maids, AmeriSpec and Furniture Medic businesses. Total franchise
fees (initial and recurring) represented 2.6% of consolidated revenue in both
2003 and 2002, respectively, and 2.5% of consolidated revenue in 2001. Related
franchise operating expenses were 1.6%, 1.7% and 1.7% of consolidated operating
expenses in 2003, 2002 and 2001, respectively. Total franchise fee income
comprised 13%, 11% and 10% of consolidated operating income before
impairment charges in 2003, 2002 and 2001, respectively. Franchise agreements
made in the course of these businesses are generally for a term of five years.
ServiceMaster renews the majority of its franchise agreements prior to their
expiration.
SALE OF TREES, INC.
In September 2003, ServiceMaster sold the assets and related operational
obligations of Trees, Inc., the utility line clearing business of TruGreen
LandCare, to an independent subsidiary of Asplundh Subsidiary Holdings, Inc.,
for approximately $20 million in cash.
COMPETITION
The following information is based on estimates, which cannot be verified,
made by ServiceMaster's management. ServiceMaster competes with many other
companies in the sale of its services, franchises and products. The principal
methods of competition in ServiceMaster's businesses include quality of service,
name recognition, pricing, assurance of customer satisfaction and reputation.
Lawn Care Services. Competition in the market for lawn care services is
strong, coming mainly from local, independently owned firms and from homeowners
who care for their own lawns.
Landscape Maintenance Services. Competition in the market for landscape
maintenance services is strong, coming mainly from small, owner-operated
companies operating in a limited geographic market and, to a lesser degree, from
a few large companies operating in multiple markets, and from property owners
who perform their own landscaping services.
7
<PAGE>
Termite and Pest Control Services. Competition in the market for termite
and pest control services is strong, coming mainly from thousands of regional
and local, independently owned firms, from homeowners who treat their own
termite and pest control problems and from one other large company which
operates on a national basis.
Home Warranty Contracts for Systems and Appliances. Competition in the
market for home warranty contracts for systems and appliances is strong, coming
mainly from regional providers of home warranties. Several competitors are
initiating expansion efforts into additional states. American Home Shield
competes with these companies for access to real estate brokers, financial
institutions and insurance agents that distribute its home warranty contracts.
Home Inspection Services. Competition in the market for home inspection
services is strong, coming mainly from regional and local, independently owned
firms.
Electrical, Heating, Ventilation and Air Conditioning Services. Competition
in the market for electrical, heating, ventilation and air conditioning services
is strong, coming mainly from local, independently owned firms throughout the
United States and a few national companies.
Plumbing and Drain Cleaning Services. Competition in the market for
plumbing and drain cleaning services is strong, coming mainly from local,
independently owned firms throughout the United States and a few national
companies.
Disaster Restoration and Cleaning Services. Competition in the market for
disaster restoration and cleaning services is strong, coming mainly from local,
independently owned firms and a few national companies.
House Cleaning Services. Competition in the market for house cleaning
services is strong, coming mainly from local, independently owned firms and a
few national companies.
Furniture Repair Services. Competition in the market for furniture repair
services is strong, coming mainly from local, independent contractors.
MAJOR CUSTOMERS
ServiceMaster has no single customer that accounts for more than 10% of its
operating revenue. Additionally, no operating segment has a single customer that
accounts for more than 10% of its operating revenue. No part of ServiceMaster's
business is dependent on a single customer or a few customers, the loss of which
would have a material adverse effect on ServiceMaster's financial condition or
results of operations.
REGULATORY COMPLIANCE
Government Regulations. ServiceMaster's operating segments are subject to
various federal, state and local laws and regulations, compliance with which
increases ServiceMaster's operating costs, limits or restricts the services
provided by ServiceMaster's operating segments or the methods by which
ServiceMaster's operating segments sell those services or conduct their
respective businesses, or subjects ServiceMaster and its operating segments to
the possibility of regulatory actions or proceedings.
These federal and state laws include laws relating to consumer protection,
wage and hour regulations, permit and license requirements, workers' safety (the
Occupational Safety and Health Act), environmental regulations and employee
benefits (the Consolidated Omnibus Budget Reconciliation Act of 1985 and the
Employee Retirement Income Security Act of 1974). The TruGreen, Terminix and
American Residential Services and American Mechanical Services segments must
also meet the Department of Transportation and Federal Motor
8
<PAGE>
Carrier Safety Administration requirements with respect to its fleet of
vehicles. American Home Shield is regulated by the Department of Insurance
in certain states and the Real Estate Commission in Texas.
Consumer Protection and Telemarketing Matters. ServiceMaster is subject to
numerous federal and state laws and regulations designed to protect consumers,
including laws governing consumer privacy and fraud, the collection and use of
consumer data, telemarketing and other forms of solicitation. Noncompliance with
these laws and regulations can subject ServiceMaster to fines or various forms
of civil or criminal prosecution, any of which could have an adverse effect on
its financial condition and results of operations.
The telemarketing rules adopted by the Federal Communications Commission
pursuant to the Federal Telephone Consumer Protection Act and the Federal
Telemarketing Sales Rule issued by the Federal Trade Commission (both of which
were amended in 2003 to establish a National Do Not Call Registry) govern
ServiceMaster's telephone sales practices. In addition, many states have adopted
statutes and regulations targeted at direct telephone sales activities. The
implementation of do-not-call lists requires TruGreen ChemLawn, and, to a lesser
extent, ServiceMaster's other operating segments, to seek additional marketing
methods and channels.
Franchise Matters. TruGreen ChemLawn, Terminix, ServiceMaster Clean, Merry
Maids, AmeriSpec, and Furniture Medic are subject to various federal and state
laws and regulations governing franchise sales and marketing and franchise trade
practices generally, including applicable rules and regulations of the Federal
Trade Commission. These laws and regulations generally require disclosure of
business information in connection with the sale of franchises. Certain state
regulations also affect the ability of the franchisor to revoke or refuse to
renew a franchise. ServiceMaster deals with franchisees in good faith and seeks
to comply with regulatory requirements. From time to time, ServiceMaster and one
or more franchisees may become involved in a dispute regarding the franchise
relationship, including, among other things, payment of royalties, location of
branches, advertising, purchase of products by franchisees, compliance with
ServiceMaster standards and franchise renewal criteria. There can be no
assurance that compliance problems will not be encountered from time to time, or
that material disputes with one or more franchisees will not arise.
Environmental Matters. ServiceMaster's businesses are subject to various
federal, state and local laws and regulations regarding environmental matters.
Terminix, TruGreen ChemLawn and TruGreen LandCare are regulated under many
federal and state environmental laws, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Environmental Pesticide Control Act of
1972 and the Federal Insecticide, Fungicide and Rodenticide Act of 1947, the
Resource Conservation and Recovery Act of 1976, the Emergency Planning and
Community Right-to-Know Act of 1986, the Oil Pollution Act of 1990 and the Clean
Water Act of 1977. American Residential Services and American Mechanical
Services are also regulated under many federal and state environmental laws,
including the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the
Resource Conservation and Recovery Act of 1976, the Emergency Planning and
Community Right-to-Know Act of 1986 and the Clean Water Act of 1977.
ServiceMaster cannot predict the effect on its operations of possible future
environmental legislation or regulations. During 2003, there were no material
capital expenditures for environmental control facilities, and no such material
expenditures are anticipated in 2004.
9
<PAGE>
EMPLOYEES
On December 31, 2003, ServiceMaster had a total of approximately 40,000
employees.
AVAILABLE INFORMATION
ServiceMaster maintains a website at http://www.svm.com that includes a
hyperlink to a website maintained by a third-party where ServiceMaster's Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and all amendments to those reports are available without charge as soon as
reasonably practicable following the time that they are filed with or furnished
to the Securities and Exchange Commission. A copy of each of ServiceMaster's
Corporate Governance Principles, Audit and Finance Committee Charter,
Compensation and Leadership Development Committee Charter, Governance and
Nominating Committee Charter, Financial Code of Ethics and Code of Conduct is
filed as an exhibit to this Form 10-K, is posted on ServiceMaster's website at
http://www.svm.com under "Corporate Governance" and is available in print to any
shareholder who requests it by writing to the Corporate Secretary at the
following address: The ServiceMaster Company, 3250 Lacey Road, Suite 600,
Downers Grove, Illinois 60515.
ITEM 2. PROPERTIES
BUSINESS SUPPORT CENTER
ServiceMaster leases approximately 66,000 square feet of office space to
accommodate personnel from the Business Support Center in Downers Grove,
Illinois. The lease expires at the end of 2012, but ServiceMaster has an option
to terminate the lease as of December 31, 2007 by giving written notice to the
lessor as of June 30, 2006. Additionally, ServiceMaster leases warehouse space
in Naperville, Illinois. ServiceMaster also leases additional office space in
Memphis, Tennessee as described below to accommodate Memphis-based personnel
from the Business Support Center. ServiceMaster believes that these office
facilities and warehouse are suitable and adequate to support the Business
Support Center's current needs in the Chicagoland and Memphis areas.
OPERATING SEGMENTS
The headquarters for TruGreen ChemLawn, TruGreen LandCare, Terminix,
American Residential Services and Rescue Rooter are located in leased premises
at 860 Ridge Lake Boulevard, Memphis, Tennessee. The headquarters for
ServiceMaster Clean, Merry Maids, Furniture Medic, American Home Shield and
AmeriSpec are located in leased premises at 889 Ridge Lake Boulevard, Memphis,
Tennessee. The headquarters for American Mechanical Services are located in
leased premises at 8039 Laurel Lake Court, Laurel, Maryland. In addition,
ServiceMaster leases space for a call center located at 6399 ShelbyView Drive,
Memphis, Tennessee, offices located at 850 and 855 Ridge Lake Boulevard,
Memphis, Tennessee, training facilities located at 1650 Shelby Oaks Drive North,
Memphis, Tennessee and 3839 Forest Hill Irene Road, Memphis, Tennessee and a
warehouse located at 1575 Two Place, Memphis, Tennessee. ServiceMaster believes
that these headquarters, call center facility, offices, training facilities and
warehouse are suitable and adequate to support the current needs of its
operating segments in the Memphis and Laurel areas.
ServiceMaster's operating companies own and lease a variety of facilities
throughout the United States for branch operations and for office, storage, call
center and data processing space. The following chart identifies for each
operating company the number of owned facilities, the number of leased
facilities, and the number of states represented by those owned and leased
facilities. ServiceMaster believes that these facilities, when considered with
the headquarters, call center facility, offices, training facilities and
warehouses described above are suitable and adequate to support the current
needs of its business.
10
<PAGE>
<TABLE>
<CAPTION>
Operating Owned Leased No. of
Company Facilities Facilities States
<S> <C> <C> <C>
TruGreen ChemLawn 4 299 42
TruGreen LandCare 2 169 25
Terminix 17 401 42
American Residential Services 5 85 25
American Mechanical Services 1 16 7
American Home Shield 1 7 4
ServiceMaster Clean 0 9 7
Merry Maids 0 63 26
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting its business activities, ServiceMaster
becomes involved in judicial, administrative and regulatory proceedings
involving both private parties and governmental authorities. As of March 12,
2004, these proceedings included general and commercial liability actions and a
small number of environmental proceedings. ServiceMaster does not expect any of
these proceedings to have a material adverse effect on its Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Form 10-K, no
matters were submitted to a vote of security holders.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ServiceMaster's common stock is traded on the New York Stock Exchange under
the symbol "SVM." At March 12, 2004, ServiceMaster's common stock was held of
record by approximately 65,000 persons. ServiceMaster estimates that
approximately 44,000 persons held shares of its common stock in the names of
nominees.
The information contained in ServiceMaster's Annual Report to Shareholders
for 2003 under the headings "Consolidated Statements of Shareholders' Equity"
and "Quarterly Cash Dividends and Per Share Data" is incorporated by reference
in this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in ServiceMaster's Annual Report to Shareholders
for 2003 under the heading "Five Year Financial Summary" in the Financial
Statements section is incorporated by reference in this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in ServiceMaster's Annual Report to Shareholders
for 2003 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is incorporated by reference in this Form
10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in ServiceMaster's Annual Report to Shareholders
for 2003 under the heading "Quantitative and Qualitative Disclosures about
Market Risk" is incorporated by reference in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Statements of Financial Position as of December 31, 2003
and 2002, the Consolidated Statements of Operations, Consolidated Statements of
Cash Flows and Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2003, 2002 and 2001 and the Notes to the Consolidated
Financial Statements contained in ServiceMaster's Annual Report to Shareholders
for 2003 are incorporated by reference in this Form 10-K. The report of Deloitte
& Touche LLP dated March 15, 2004 on the Consolidated Financial Statements
contained in ServiceMaster's Annual Report to Shareholders for 2003 are also
incorporated by reference in this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 20, 2002, ServiceMaster, with the approval of the Board of Directors
and the Audit and Finance Committee, dismissed Arthur Andersen LLP as its
independent auditors and engaged Deloitte & Touche LLP as its new independent
auditors. The appointment of Deloitte & Touche became effective on May 22, 2002.
During the two years ended December 31, 2001 and 2000, and the interim period
subsequent to December 31, 2001, and through May 20, 2002, there were no
disagreements between ServiceMaster and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to Arthur Andersen's satisfaction,
would have caused Arthur Andersen to make reference to the subject
12
<PAGE>
matter in connection with its reports on ServiceMaster's consolidated financial
statements for such periods. Arthur Andersen's report on ServiceMaster's
consolidated financial statements for the years ended December 31, 2001 and
2000 did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001 and 2000, and the interim period from
January 1, 2002 through May 20, 2002, there were no reportable events as
described under Item 304(a)(1)(v) of Regulation S-K. During the years ended
December 31, 2001 and 2000, and through May 20, 2002, ServiceMaster did not
consult with Deloitte & Touche with respect to the application of accounting
principles to a specified transaction, either completed or proposed, the type
of audit opinion that might be rendered on ServiceMaster's consolidated
financial statements, or any matter that was the subject of a disagreement or a
reportable event, as described in Items 304(a)(2)(i)and (ii)of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
ServiceMaster's Chairman and Chief Executive Officer, Jonathan P. Ward, and
ServiceMaster's President and Chief Financial Officer, Ernest J. Mrozek, have
evaluated ServiceMaster's disclosure controls and procedures as of the end of
the period covered by this Form 10-K.
ServiceMaster's disclosure controls and procedures include a roll-up of
financial and non-financial reporting that is consolidated in the principal
executive office of ServiceMaster in Downers Grove, Illinois. The reporting
process is designed to ensure that information required to be disclosed by
ServiceMaster in the reports that it files with or submits to the Securities and
Exchange Commission is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. Messrs. Ward and Mrozek have concluded that both the design and operation
of ServiceMaster's disclosure controls and procedures are effective.
There were no changes in ServiceMaster's internal control over financial
reporting that occurred during ServiceMaster's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect,
ServiceMaster's internal control over financial reporting.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information contained in ServiceMaster's Proxy Statement for the 2004
Annual Meeting of Shareholders under the heading "Item 1 - Election of
Directors" is incorporated by reference in this Form 10-K.
EXECUTIVE OFFICERS OF SERVICEMASTER
The following table shows (i) the names and ages (as of March 12, 2004) of
ServiceMaster's executive officers, (ii) all positions presently held by each
executive officer, and (iii) the year each person became an officer of
ServiceMaster. Each person has served as an officer continuously since the year
shown.
<TABLE>
<CAPTION>
First Became
Name Age Present Positions an Officer
- ---- --- ----------------- -----------
<S> <C> <C> <C>
Jonathan P. Ward 49 Chairman and Chief Executive Officer 2001
Ernest J. Mrozek 50 President and Chief Financial Officer 1987
Steven C. Preston 43 Executive Vice President 1997
Steven B. Bono 51 Senior Vice President, Corporate Communications 2001
Albert T. Cantu 42 President and Chief Operating Officer, Terminix 1991
Scott J. Cromie 47 President and Chief Operating Officer, American Home Shield 1990
Mitchell T. Engel 51 Chief Marketing Officer 2002
James A. Goetz 46 Senior Vice President and Chief Information Officer 2000
Jim L. Kaput 43 Senior Vice President and General Counsel 2000
Elizabeth L. Reeves 50 Senior Vice President for Human Resources 2002
David M. Slott 45 President and Chief Operating Officer, TruGreen ChemLawn 1992
</TABLE>
Mr. Ward is also a director of ServiceMaster. For biographical information
with respect to Mr. Ward, see "Item 1 - Election of Directors" in
ServiceMaster's Proxy Statement for the 2004 Annual Meeting of Shareholders.
Ernest J. Mrozek, age 50, is President and Chief Financial Officer. He
served as President and Chief Operating Officer from April 2002 to January 2004.
He served as President of ServiceMaster Consumer and Commercial Services from
November 1998 to April 2002.
Steven C. Preston, age 43, is Executive Vice President. He served as
Executive Vice President and Chief Financial Officer from July 1998 to January
2004. He served as Senior Vice President and Chief Financial Officer from April
1997 through June 1998.
14
<PAGE>
Steven B. Bono, age 51, has served as Senior Vice President, Corporate
Communications since July 2001. He was on sabbatical from May 2000 to July 2001.
Mr. Bono served as Vice President, Communications Strategy of Jack Morton
Worldwide in Chicago, Illinois from September 1997 to May 2000.
Albert T. Cantu, age 42, has served as President and Chief Operating
Officer, Terminix since January 1999. From October 1994 to December 1998, he was
Vice President of Operations, Terminix.
Scott J. Cromie, age 47, has served as President and Chief Operating
Officer, American Home Shield since October 1996.
Mitchell T. Engel, age 51, is Chief Marketing Officer. He served as
Principal of Engel Marketing Services from April 1998 to April 2002.
James A. Goetz, age 46, is Senior Vice President and Chief Information
Officer. He served as Chief Information Officer of The ServiceMaster Home
Service Center L.L.C. from September 2000 to January 2002. From January 1999 to
August 2000, he was Director of Internet Services at IBM Global Services. From
May 1996 to December 1998, he was Director of Internet Partnering at IBM Global
Network.
Jim L. Kaput, age 43, is Senior Vice President and General Counsel of
ServiceMaster. From June 1994 until he joined ServiceMaster in April 2000, Mr.
Kaput was a partner at the law firm of Sidley & Austin in Chicago, Illinois.
Elizabeth L. Reeves, age 50, is Senior Vice President for Human Resources.
She served as Executive Vice President of Global Human Resources for Bcom3 from
October 2000 to September 2002. From March 1997 to September 2000 she was Group
Vice President, Human Resources for CNA.
David M. Slott, age 45, is President and Chief Operating Officer, TruGreen
ChemLawn. He served as Chief Operating Officer of The TruGreen Companies from
January 2001 to October 2003. From January 1996 to January 2001, he served as
President and Chief Operating Officer, TruGreen ChemLawn.
FINANCIAL CODE OF ETHICS
ServiceMaster has a Financial Code of Ethics which applies to
ServiceMaster's Chief Executive Officer, Chief Financial Officer, Controller,
Treasurer, Business Unit Chief Financial Officers or persons performing similar
functions and other designated officers and employees. A copy of the Financial
Code of Ethics is filed as an exhibit to this Form 10-K and is posted on
ServiceMaster's website at http://www.svm.com under "Corporate Governance".
AUDIT AND FINANCE COMMITTEE FINANCIAL EXPERT
The information contained in ServiceMaster's Proxy Statement for the 2004
Annual Meeting of Shareholders under the heading "Board and Committees of the
Board" is incorporated by reference in this Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information contained in ServiceMaster's Proxy Statement for the 2004
Annual Meeting of Shareholders under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated by reference in this Form 10-K.
15
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information contained in ServiceMaster's Proxy Statement for the 2004
Annual Meeting of Shareholders under the headings "Compensation of Directors,"
"Executive Compensation" and "Agreements with Officers and Directors" is
incorporated by reference in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in ServiceMaster's Proxy Statement for the 2004
Annual Meeting of Shareholders under the headings "Ownership of Our Common
Stock" and "Equity Compensation Plan Information" is incorporated by reference
in this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in ServiceMaster's Proxy Statement for the 2004
Annual Meeting of Shareholders under the heading "Certain Transactions and
Relationships" is incorporated by reference in this Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in ServiceMaster's Proxy Statement for the 2004
Annual Meeting of Shareholders under the heading "Item 4 - Ratification of
Selection of Independent Auditors" is incorporated by reference in this Form
10-K.
16
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules, and Exhibits.
1. Financial Statements
The documents shown below are contained in ServiceMaster's Annual Report
to Shareholders for 2003 and are incorporated by reference in Part II,
Item 8 of this Form 10-K:
Report of Independent Auditors
Consolidated Statements of Operations for the three years
ended December 31, 2003, 2002 and 2001
Consolidated Statements of Financial Position as of
December 31, 2003 and 2002
Consolidated Statements of Cash Flows for the three years
ended December 31, 2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 2003, 2002 and 2001
Notes to the Consolidated Financial Statements
2. Financial Statements Schedules
Schedule IV-Amounts Receivable from Related Parties and Underwriters,
Promoters, and Employees other than Related Parties:
None
Included in Part IV of this Form 10-K:
Schedule II-Valuation and Qualifying Accounts
Independent Auditors' Report on Schedule
Exhibit 23-Independent Auditors' Consent
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
given in the consolidated financial statements or notes thereto.
3. Exhibits
The exhibits filed with this report are listed on pages 23-27 (the
"Exhibits Index"). Entries marked by an asterisk next to the exhibit's number
identify management contracts or compensatory plans, contracts or arrangements
in which a director or any of ServiceMaster's executive officers to be
identified in the summary compensation table included in ServiceMaster's Proxy
Statement for the 2004 Annual Meeting of Shareholders participates or
compensatory plans, contracts or arrangements adopted without approval of
security holders pursuant to which ServiceMaster may award equity and in which
any ServiceMaster employee currently participates.
17
<PAGE>
(b) Reports on Form 8-K.
ServiceMaster filed with or furnished to the Securities and Exchange
Commission the following reports on Form 8-K during the last quarter
of 2003:
A report on Form 8-K was furnished on November 5, 2003. The purpose of
the report was to provide under Item 12, the press release issued by
ServiceMaster on November 5, 2003 announcing the preliminary financial
results for the third quarter of 2003.
A report on Form 8-K was furnished on November 5, 2003. The purpose of
the report was to restate previously reported quarterly consolidated
statements of income and quarterly business segment disclosures to
reflect the reclassification to discontinued operations of
ServiceMaster's sold utility line clearing business that was sold
during the fourth quarter of 2003.
18
<PAGE>
INDEPENDENT AUDITORS REPORT
To Shareholders of The ServiceMaster Company Downers Grove, IL
We have audited the financial statements of The ServiceMaster Company and
subsidiaries (the "Company") as of December 31, 2003 and 2002, and for each of
the three years in the period ended December 31, 2003, and have issued our
report thereon dated March 15, 2004 (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
and the adoption of SFAS No. 142, Goodwill and Other Intangible Assets), such
financial statements and report are included in your 2003 Annual Report to
Shareholders and are incorporated herein by reference. Our audits also included
the financial statement schedule of the Company, listed in Item 15. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Chicago, IL
March 15, 2004
19
<PAGE>
SCHEDULE II
THE SERVICEMASTER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Balance at
Period Expenses Deductions (1) End of Period
----------- ----------- --------------- --------------
<S> <C> <C> <C> <C>
AS OF AND FOR THE YEAR ENDING DECEMBER 31, 2003
Continuing Operations -
Allowance for doubtful accounts
Accounts receivable $ 24,344 $ 35,166 $ 36,439 $ 23,071
Notes receivable 3,140 1,759 1,750 3,149
Reserves related to strategic actions in the fourth
quarter of 2001 (2) 15,494 (1,300) 3,408 10,786
Remaining liabilities from discontinued operations
LandCare Construction 13,974 - 6,822 7,152
LandCare utility line clearing business (3) 6,393 2,803 185 9,011
Certified Systems, Inc. 13,586 - 2,562 11,024
Management Services 1,569 - 1,286 283
International businesses 21,348 1,000 10,331 12,017
Other 10,436 - 1,147 9,289
AS OF AND FOR THE YEAR ENDING DECEMBER 31, 2002
Continuing Operations -
Allowance for doubtful accounts
Accounts receivable $ 26,151 $ 40,590 $ 42,397 $ 24,344
Notes receivable 2,084 1,056 - 3,140
Reserves related to strategic actions in the fourth
quarter of 2001 (2) 35,959 (5,600) 14,865 15,494
Remaining liabilities from discontinued operations
LandCare Construction 34,229 2,634 22,889 13,974
Certified Systems, Inc. 23,762 3,500 13,676 13,586
Management Services 7,400 (4,500) 1,331 1,569
International businesses (4) 19,604 21,900 20,156 21,348
Other 16,054 615 6,233 10,436
AS OF AND FOR THE YEAR ENDING DECEMBER 31, 2001
Continuing Operations -
Allowance for doubtful accounts
Accounts receivable $ 29,219 $ 32,491 $ 35,559 $ 26,151
Notes receivable 1,691 516 123 2,084
Reserves related to strategic actions in the fourth
quarter of 2001 (2) - 40,000 4,041 35,959
Remaining liabilities from discontinued operations
LandCare Construction 5,243 32,200 3,214 34,229
Certified Systems, Inc. 12,595 12,995 1,828 23,762
Management Services - 22,687 15,287 7,400
Other 754 15,300 - 16,054
</TABLE>
(1) Deductions in the allowance for doubtful accounts and notes receivable
reflect write-offs of uncollectible accounts Deductions for the
remaining items reflect cash payments, except for the items noted in
(3) and (4).
(2) Includes accruals for residual value guarentees on leased properties,
severance for former executives and terminated employees, and
transaction and other costs.
(3) The Company sold the assets and related operational obligations of
Trees, Inc, the utility line clearing operations of TruGreen LandCare.
The Company retained certain liabilities and recorded accruals in
connection with the sold operations. The beginning balance represents
the liabilities of the discontinued operations that existed prior to
their disposition. Additions reflect costs recorded related to exiting
the operations.
(4) The liabilites of this business assumed by the buyer of the sold
operations totaled $19.6 million. The Company recorded accruals in
connection with the 2002 sold operations and a cash adjustment to the
purchase price of the 2001 disposition. The beginning balance
represents the liabilities of the discontinued operations that existed
prior to their disposition. Additions reflect costs recorded related
to exiting the operations.
20
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SERVICEMASTER COMPANY
Date: March 15, 2004 By /s/ JONATHAN P. WARD
-------------------------------
Jonathan P. Ward
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JONATHAN P. WARD Chairman and Chief Executive March 15, 2004
- ---------------------- Officer and Director
Jonathan P. Ward
/s/ ERNEST J. MROZEK President and March 15, 2004
- ---------------------- Chief Financial Officer (Principal
Ernest J. Mrozek Financial Officer and Principal
Accounting Officer)
/s/ PAUL W. BEREZNY, JR. Director March 5, 2004
- ---------------------------
Paul W. Berezny, Jr.
__________________________ Director
John L. Carl
__________________________ Director
Brian Griffiths
/s/ SIDNEY E. HARRIS Director March 5, 2004
- ---------------------------
Sidney E. Harris
/s/ ROBERTO R. HERENCIA Director March 5, 2004
- ---------------------------
Roberto R. Herencia
__________________________ Director
Herbert P. Hess
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
/s/ JAMES D. McLENNAN Director March 5, 2004
- ----------------------
James D. McLennan
/s/ DALLEN W. PETERSON Director March 5, 2004
- ---------------------------
Dallen W. Peterson
/s/ BETTY JANE SCHEIHING Director March 5, 2004
- ------------------------
Betty Jane Scheihing
/s/ DAVID K. WESSNER Director March 5, 2004
- ---------------------------
David K. Wessner
</TABLE>
22
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- -----------------------------------------------------------------------------
3(i) Amended and Restated Certificate of Incorporation of The ServiceMaster
Company, a Delaware corporation, as filed with the Secretary of State,
State of Delaware, on November 6, 1997 is incorporated by reference to
Exhibit 1 to the registrant's Current Report on Form 8-K, No. 2 dated
February 26, 1998 (File No. 1-14762) (the "1998 8-K, No. 2").
3(ii) Bylaws of The ServiceMaster Company, as amended through April 26, 2002,
are incorporated by reference to Exhibit 3(ii) to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
(File No. 1-14762) (the "2002 10-Q").
4.1 Shareholder Rights Agreement between The ServiceMaster Company and the
Harris Trust and Savings Bank, as adopted on December 12, 1997, is
incorporated by reference to Exhibit 3 to the 1998 8-K, No.2.
4.2 Certificate of Designation, Preferences and Rights of Junior
Participating Preferred Stock, Series A, is incorporated by reference
to Exhibit 4 to the 1998 8-K, No. 2.
4.3 Indenture dated as of August 15, 1997 between The ServiceMaster Company
and the Harris Trust and Savings Bank, as trustee, is incorporated by
reference to Exhibit 4.1 to the registrant's Registration Statement on
Form S-3 (File No. 333-32167) (the "1997 S-3").
4.4 First Supplemental Indenture dated as of August 15, 1997 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 4.4 to the
registrant's Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-14762) (the "1997 10-K").
4.5 Second Supplemental Indenture dated as of January 1, 1998 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 2 to the registrant's
Current Report on Form 8-K, No. 1 dated February 26, 1998 (File No.
1-14762).
4.6 Third Supplemental Indenture dated as of March 2, 1998 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 4.3 to the
registrant's Current Report on Form 8-K, No. 3 dated February 27, 1998
(File No. 1-14762) (the "1998 8-K, No. 3").
4.7 Fourth Supplemental Indenture dated as of August 10, 1999 between The
ServiceMaster Company and the Harris Trust and Savings Bank, as
trustee, is incorporated by reference to Exhibit 3 to the registrant's
Current Report on Form 8-K dated August 16, 1999 (File No. 1-14762)
(the "1999 8-K").
4.8 Indenture dated as of November 18, 1999 between The ServiceMaster
Company and the Harris Trust and Savings Bank, as trustee, is
incorporated by reference to Exhibit 4.16 to the registrant's
Registration Statement on Form S-3 (File No. 333-91381), filed on
November 19, 1999 (the "1999 S-3").
4.9 First Supplemental Indenture dated as of April 4, 2000 between The
ServiceMaster Company and Harris Trust and Savings Bank, as trustee, is
incorporated by reference to Exhibit 4.2 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000 (File No.
1-14762) (the "2000 10-Q").
4.10 Forms of 6.95% Note due August 14, 2007 and 7.45% Note due August 14,
2027 are incorporated by reference to Exhibit 4.2 to the 1997 S-3.
4.11 Form of 7.10% Note due March 1, 2018 is incorporated by reference to
Exhibit 4.1 the 1998 8-K, No. 3.
4.12 Form of 7.25% Note due March 1, 2038 is incorporated by reference to
Exhibit 4.2 to the 1998 8-K, No. 3.
4.13 Form of 7.875% Note due August 15, 2009 is incorporated by reference to
Exhibit 4 to the 1999 8-K.
23
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- -----------------------------------------------------------------------------
4.14 Form of 7.875% Note due August 15, 2009 is incorporated by reference to
Exhibit 5 to the 1999 8-K.
4.15 Form of 8.45% Note due April 15, 2005 is incorporated by reference to
Exhibit 4.1 to the 2000 10-Q.
4.16 $490,000,000 Credit Agreement dated as of December 12, 2001 among The
ServiceMaster Company, the Lenders, JPMorgan Chase Bank, Bank of
America, Bank One N.A., First Union National Bank and SunTrust Bank is
incorporated by reference to Exhibit 4.16 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No.
1-14762) (the "2001 10-K").
10.1* Senior Executive Ownership Election Plan, as approved by the Board of
Directors on December 10, 1999, is incorporated by reference to Exhibit
10.5 to the Annual Report on Form 10-K for the year ended December 31,
1999 (File No. 1-14762).
10.2* 10-Plus Plan, as amended September 3, 1991, is incorporated by
reference to Exhibit 10.21 to the ServiceMaster Limited Partnership
Annual Report on Form 10-K for the year ended December 31, 1991 (File
No. 1-09378) (the "1991 10-K").
10.3* Form of Option Agreement for the 10-Plus Plan, as amended September 3,
1991, is incorporated by reference to Exhibit 10.22 to the 1991 10-K.
10.4* 1994 Non-Employee Directors Share Option Plan is incorporated by
reference to Exhibit 4.2 to the ServiceMaster Limited Partnership
Registration Statement on Form S-8 (File No. 33-55761), filed on
October 4, 1994 (the "1994 S-8").
10.5* Form of Option Agreement for the 1994 Non-Employee Director Share
Option Plan is incorporated by reference to Exhibit 4.3 to the 1994
S-8.
10.6* 1997 Share Option Plan is incorporated by reference to Exhibit 10.28 to
the ServiceMaster Limited Partnership Annual Report on Form 10-K for
the year ended December 31, 1996 (File No. 1-09378) (the "1996 10-K").
10.7* Form of Option Agreement for the 1997 Share Option Plan is incorporated
by reference to Exhibit 10.29 to the 1996 10-K.
10.8* 1998 Equity Incentive Plan is incorporated by reference to Exhibit
10.15 to the 1997 10-K.
10.9* Form of Option Agreement for the 1998 Equity Incentive Plan
(Non-Qualifying Stock Options) is incorporated by reference to Exhibit
10.20 to the 1997 10-K.
10.10* Form of Option Agreement for the 1998 Equity Incentive Plan (Incentive
Stock Options) is incorporated by reference to Exhibit 10.21 to the
1997 10-K.
10.11* 1998 Non-Employee Directors Discounted Stock Option Plan is
incorporated by reference to Exhibit 10.21 to the 1997 10-K.
10.12* 1998 Long-Term Performance Award Plan is incorporated by reference to
Exhibit 10.22 to the 1997 10-K.
10.13* 2000 Equity Incentive Plan is incorporated by reference to Exhibit 4.4
to the registrant's Registration Statement on Form S-8 (File No.
333-42680), filed on July 31, 2000 (the "2000 S-8").
24
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- -----------------------------------------------------------------------------
10.14* Form of Option Agreement for the 2000 Equity Incentive Plan is
incorporated by reference to Exhibit 10.17 to the 2001 10-K.
10.15* Form of Restricted Stock Award Agreement for the 2000 Equity Incentive
Plan is incorporated by reference to Exhibit 10.31 to the 2001 10-K.
10.16* WeServeHomes.com 2000 Stock Option/Stock Issuance Plan is incorporated
by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the
year ended December 31, 2000 (File No. 1-14762) (the "2000 10-K").
10.17* Form of Stock Option Agreement for the WeServeHomes.com 2000 Stock
Option/Stock Issuance Plan is incorporated by reference to Exhibit
10.22 to the 2000 10-K.
10.18* Form of Stock Purchase Agreement for the WeServeHomes.com 2000 Stock
Option/Stock Issuance Plan is incorporated by reference to Exhibit
10.23 to the 2000 10-K.
10.19* 2001 Directors Stock Plan, as amended and restated effective January
24, 2003, is incorporated by reference to Exhibit 10.20 to the Annual
Report on Form 10-K for the year ended December 31, 2002 (the "2002
10-K").
10.20* Form of Option Agreement for the 2001 Directors Stock Plan is
incorporated by reference to Exhibit 4.4 to the registrant's
Registration Statement on Form S-8 (File No. 333-65520), filed on July
20, 2001.
10.21* Corporate Performance Plan, formerly known as the 2001 Long-Term
Performance Award Plan, as amended March 16, 2001, is incorporated by
reference to Exhibit 10.2 to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2001 (File No. 1-14762).
10.22* Form of Change in Control Severance Agreement is incorporated by
reference to Exhibit 10.30 to the 2001 10-K.
10.23* ServiceMaster 2003 Equity Incentive Plan is incorporated by reference
to Exhibit 4.6 to the registrant's Registration Statement on Form S-8
(File No. 333-106356), filed on June 23, 2003.
10.24*+ Form of Stock Option Agreement for the ServiceMaster 2003 Equity
Incentive Plan.
10.25*+ Form of Restricted Stock Award Agreement for the ServiceMaster 2003
Equity Incentive Plan.
10.26*+ Form of Stock Appreciation Right Agreement for the ServiceMaster 2003
Equity Incentive Plan.
10.27* 2002 Directors Deferred Fees Plan, effective October 25, 2002, is
incorporated by reference to Exhibit 10.35 to the 2002 10-K.
10.28* ServiceMaster Employee Share Purchase Plan, as amended and restated
effective October 4, 2001, is incorporated by reference to Exhibit
10.37 to the 2001 10-K.
10.29* ServiceMaster Deferred Compensation Plan, as amended and restated
effective October 24, 2002, is incorporated by reference to Exhibit
10.29 to the 2002 10-K.
10.30* Employment Agreement dated as of January 9, 2001 between The
ServiceMaster Company and Jonathan P. Ward is incorporated by reference
to Exhibit 10.19 to the 2000 10-K.
25
<PAGE>
Exhibits Index
Exhibit No. Description of Exhibit
- -----------------------------------------------------------------------------
10.31* Stock Option Agreement dated as of January 9, 2001 between The
ServiceMaster Company and Jonathan P. Ward is incorporated by reference
to Exhibit 10.20 to the 2000 10-K.
10.32*+ Stock Option Agreement dated as of February 8, 2002 between The
ServiceMaster Company and Jonathan P. Ward.
10.33*+ Restricted Stock Unit Award Agreement dated as of December 18, 2003
between The ServiceMaster Company and Jonathan P. Ward.
10.34* Letter Agreement dated as of June 1, 2001 between The ServiceMaster
Company and Carlos Cantu is incorporated by reference to Exhibit 10.1
to the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001 (File No. 1-14762).
10.35* Employment Agreement dated as of April 1, 2002 between The
ServiceMaster Company and Mitchell T. Engel is incorporated by
reference to Exhibit 10.25 to the 2002 10-K.
10.36*+ Letter Agreement dated as of January 1, 2004 between The ServiceMaster
Company and C. William Pollard.
10.37*+ Stock Option Agreement dated as of March 16, 2001 between The
ServiceMaster Company and C. William
Pollard.
10.38*+ Employment Agreement dated as of January 1, 2004 between The
ServiceMaster Company and Ernest J. Mrozek.
13+ Annual Report to Shareholders for the year ended December 31, 2003 (the
"2003 Annual Report"). The parts of the 2003 Annual Report which are
expressly incorporated into this report by reference shall be deemed
filed with this report. All other parts of the 2003 Annual Report are
furnished for the information of the Securities and Exchange Commission
and are not filed with this report.
14+ Financial Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley
Act of 2002.
21+ Subsidiaries of ServiceMaster.
23+ Consent of Deloitte & Touche LLP.
31.1+ Certification of Chief Executive Officer pursuant to Rule 13a - 14
(a) or 15d - 14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2+ Certification of Chief Financial Officer pursuant to Rule 13a - 14 (a)
or 15d - 14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1+ Certification of Chief Executive Officer pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+ Certification of Chief Financial Officer pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1+ Corporate Governance Principles dated as of January 30, 2004.
99.2+ Audit and Finance Committee Charter dated as of January 30, 2004.
26
<PAGE>
99.3+ Compensation and Leadership Development Committee Charter dated as of
January 30, 2004.
99.4+ Governance and Nominating Committee Charter dated as of October 24,
2003.
- ----------------
* Indicates compensatory plan, contract, or arrangement.
+ Filed herewith.
27
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE SERVICEMASTER COMPANY
As of March 12, 2004, ServiceMaster had the following subsidiaries:
<TABLE>
<CAPTION>
State or Country
of
Incorporation
Subsidiary or Organization
- ---------- -----------------
<S> <C>
ServiceMaster Consumer Services Limited Partnership........................................................Delaware
ServiceMaster Consumer Services, Inc..................................................................... Delaware
TruGreen Limited Partnership...............................................................................Delaware
TruGreen, Inc............................................................................................ Delaware
Barefoot Grass Canada, Inc................................................................................ Delaware
TruGreen LandCare L.L.C. 1.................................................................................Delaware
TruGreen Companies L.L.C...................................................................................Delaware
The Terminix International Company Limited Partnership.....................................................Delaware
Terminix International, Inc.............................................................................. Delaware
ServiceMaster Residential/Commercial Services Limited Partnership..........................................Delaware
SM Clean L.L.C.............................................................................................Delaware
Merry Maids Limited Partnership............................................................................Delaware
MM Maids L.L.C.............................................................................................Delaware
American Home Shield Corporation 2.........................................................................Delaware
AmeriSpec, Inc........................................................................................... Delaware
Furniture Medic Limited Partnership........................................................................Delaware
FM Medic L.L.C.............................................................................................Delaware
American Residential Services Holding L.L.C. 3.............................................................Delaware
ServiceMaster Aviation L.L.C...............................................................................Illinois
The ServiceMaster Acceptance Company Limited Partnership...................................................Delaware
ServiceMaster Acceptance Corporation.......................................................................Delaware
ServiceMaster Holding Corporation..........................................................................Delaware
ServiceMaster BSC L.L.C....................................................................................Delaware
ServiceMaster Funding Company L.L.C........................................................................Delaware
ServiceMaster Management Corporation.......................................................................Delaware
Steward Insurance Company...................................................................................Vermont
</TABLE>
- --------
1 .......TruGreen LandCare L.L.C. has 12 subsidiaries.
2 .......American Home Shield Corporation has 14 subsidiaries, including
AmeriSpec, Inc.
3 .......American Residential Services Holding L.L.C. has 24 subsidiaries.
1
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-113322, 333-106365, 333-110672, 333-81670, 333-73764, 333-65520, 333-53142,
333-50886, 333-42680, 333-78239, 333-74781, 333-55761 on Form S-8, Registration
Statement No. 333-91381 on Form S-3, and Registration Statements No. 333-75069
on Form S-4 of The ServiceMaster Company and subsidiaries of our report dated
March 15, 2004 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13 and Technical Corrections and the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets), appearing in
and incorporated by reference in this Annual Report on Form 10-K of The
ServiceMaster Company and subsidiaries for the year ended December 31, 2003.
/s/ DELOITTE & TOUCHE LLP
Chicago, IL
March 15, 2004
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>exh10-24.txt
<DESCRIPTION>STOCK OPTION AGREEMENT
<TEXT>
EXHIBIT 10.24
THE SERVICEMASTER COMPANY
STOCK OPTION AGREEMENT
______________, 2004
The ServiceMaster Company (the "Company") hereby grants to the
Optionee as of the Grant Date, pursuant to the provisions of the Plan, the
Option to purchase the number of Option Shares specified in the Term Sheet at
the Exercise Price per share upon and subject to the terms and conditions set
forth below and in the Term Sheet. References to employment shall also mean an
agency or independent contractor relationship and references to employment by
the Company shall also mean employment by a Subsidiary. Capitalized terms not
defined herein shall have the meanings specified in the Term Sheet or the Plan.
1. Option Subject to Acceptance of Agreement. The Option shall
-----------------------------------------
be null and void unless the Optionee shall accept this Agreement by
executing one copy of the related Term Sheet and returning an original
execution copy to the Company.
2. Time and Manner of Exercise of Option.
-------------------------------------
2.1. Maximum Term of Option. In no event may the Option
----------------------
be exercised, in whole or in part, after the Expiration Date.
2.2. Exercise of Option. (a) Except as otherwise provided by
-------------------
this Section 2.2(b) and by Section 5.8 of the Plan, the Option shall
become exercisable in accordance with the Exercise Schedule set forth
in the Term Sheet.
(b) If the Optionee's employment with the Company terminates
by reason of Disability or death, the Option shall be immediately
exercisable with respect to all of the Option Shares on the effective
date of the Optionee's termination of employment or date of death and
may thereafter be exercised by the Optionee or the Optionee's Legal
Representative or Permitted Transferees, as the case may be, until and
including the earliest to occur of (i) the date which is two years
after the effective date of the Optionee's termination of employment or
date of death and (ii) the Expiration Date.
(c) If the Optionee's employment with the Company terminates
after a minimum of fifteen years of employment (fifteen years need not
be consecutive) with the Company or a combined age and years of service
totaling 65 ("Retirement"), the Option shall continue in accordance
with its terms and, to the extent the Option shall be or become
exercisable with respect to the Option Shares, may thereafter be
exercised by the Optionee or the Optionee's Legal Representative until
the Expiration Date.
(d) If the Optionee's employment with the Company terminates
for any reason other than Disability, death or Retirement, the Option
shall be exercisable only to the extent it is exercisable on the
effective date of the Optionee's termination of employment and may
thereafter be exercised by the Optionee or the Optionee's Legal
Representative until and including the earliest to occur of (i) the
date which is six months after the effective date of the Optionee's
termination of employment and (ii) the Expiration Date; provided that
<PAGE>
if the Optionee's employment is terminated for Gross Misconduct, the
Option shall terminate automatically on the effective date of the
Optionee's termination of employment. Gross Misconduct means the
commission of any act of fraud, embezzlement or dishonesty by the
Optionee, any unauthorized use or disclosure by the Optionee of
confidential information or trade secrets of the Company or any
Subsidiary, or any other intentional misconduct by the Optionee
adversely affecting the business or affairs of the Company or any
Subsidiary in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Company
or any Subsidiary may consider as grounds for the dismissal or
discharge of the Optionee or any other individual in the employment of
the Company or any Subsidiary.
(e) If the Optionee dies during the post-employment exercise
period pursuant to Section 2.2(b) following termination of employment
by reason of Disability, the Option shall be exercisable only to the
extent it is exercisable on the date of death, and may thereafter be
exercised by the Optionee's Legal Representative or Permitted
Transferees, as the case may be, until the earlier to occur of (i) two
years after the effective date of the Optionee's termination of
employment and (ii) the Expiration Date.
(f) If the Optionee dies following termination of employment
by reason of Retirement and prior to the Expiration Date, the Option
shall be exercisable only to the extent it is exercisable on the date
of death, and may thereafter be exercised by the Optionee's Legal
Representative or Permitted Transferees, as the case may be, until the
earliest to occur of (i) two years after the date of death and (ii) the
Expiration Date.
(g) If the Optionee dies during post-employment exercise
period determined pursuant to Section 2.2(d) following termination of
employment for any reason other than Disability, Retirement or Gross
Misconduct, the Option shall be exercisable only to the extent it is
exercisable on the date of death, the Option may thereafter be
exercised by the Optionee's Legal Representative or Permitted
Transferees, as the case may be, until the earliest to occur of (i) six
months after the effective date of the Optionee's termination of
employment and (ii) the Expiration Date.
2.3. Method of Exercise. Subject to the limitations set forth
------------------
in this Agreement, the Option may be exercised by the Optionee (1) by
giving written notice to the Company specifying the number of whole
shares of Stock to be purchased and accompanied by payment therefor in
full (or arrangement made for such payment to the Company's
satisfaction) either (i) in cash, (ii) by delivery (either actual
delivery or by attestation procedures established by the Company) of
previously owned whole shares of Stock (which the Optionee has good
title, free and clear of all liens and encumbrances) having an
aggregate Fair Market Value, determined as of the date of exercise,
equal to the aggregate purchase price payable pursuant to the Option by
reason of such exercise, (iii) except as shall be prohibited by Section
402 of the Sarbanes-Oxley Act of 2002, in cash by a broker-dealer
acceptable to the Company to whom the Optionee has submitted an
irrevocable notice of exercise or (iv) a combination of (i) and (ii),
and (2) by executing such documents as the Company may reasonably
request. The Company shall have sole discretion to disapprove of an
election pursuant to any of clauses (ii) - (iv). Any fraction of a
share of Stock which would be required to pay such purchase price shall
be disregarded and the remaining amount due shall be paid in cash by
the Optionee. No book-entry record or certificate
2
<PAGE>
representing a share of Stock shall be delivered until the full
purchase price therefor has been paid.
2.4. Termination of Option and Forfeiture of Option Gain. (a)
---------------------------------------------------
Notwithstanding the Term Sheet or any provision of this Agreement, if
at any time prior to the date that is one year after the date of
exercise of all or any portion of the Option, the Optionee:
(1) directly or indirectly (whether as owner, stockholder,
director, officer, employee, principal, agent, consultant, independent
contractor, partner or otherwise), in North America or any other
geographic area in which the Company is then conducting business, owns,
manages, operates, controls, participates in, performs services for, or
otherwise carries on, a business similar to or competitive with the
business conducted by the Company or any Subsidiary; or
(2) directly or indirectly attempts to induce any employee of
the Company to terminate or abandon his or her employment for any
purpose whatsoever or any attempt directly or indirectly to solicit the
trade or business of any current or prospective customer, supplier or
partner of the Company; or
(3) directly or indirectly engages in any activity which is
contrary, inimical or harmful to the interests of the Company,
including but not limited to (i) violations of Company policies (ii)
disclosure or misuse of any confidential information or trade secrets
of the Company or a Subsidiary (iii) participation in any activity not
approved by the Committee which could reasonably be foreseen as
contributing to or resulting in a Change in Control of the Company and
(iv) conduct related to employment for which either criminal or civil
penalties may be sought;
then the Option shall terminate automatically on the date the Optionee engages
in such activity and the Optionee shall pay the Company, within five business
days of receipt by the Optionee of a written demand therefor, an amount in cash
determined by multiplying the number of shares of Stock purchased pursuant to
each exercise of the Option within the one-year period described above (without
reduction for any shares of Stock delivered by the Optionee or withheld by the
Company pursuant to Section 2.3 or Section 3.2) by the difference between (i)
the Fair Market Value of a share of Stock on the date of such exercise and (ii)
the Exercise Price per share of Stock.
(b) The Optionee may be released from the Optionee's
obligations under Section 2.4(a) only if and to the extent the Committee
determines in its sole discretion that such a release is in the best interests
of the Company.
(c) The Optionee agrees that by executing this Agreement the
Optionee authorizes the Company and its Subsidiaries to deduct any amount or
amounts owed by the Optionee pursuant to Section 2.4(a) from any amounts payable
by the Company or any Subsidiary to the Optionee, including, without limitation,
any amount payable to the Optionee as salary, wages, vacation pay or bonus. This
right of setoff shall not be an exclusive remedy and the Company's or a
Subsidiary's election not to exercise this right of setoff with respect to any
3
<PAGE>
amount payable to the Optionee shall not constitute a waiver of this right of
setoff with respect to any other amount payable to the Optionee or any other
remedy.
3. Additional Terms and Conditions of Option.
-----------------------------------------
3.1. Nontransferability of Option. The Option may not be
----------------------------
transferred by the Optionee other than (i) by will or the laws of descent and
distribution or (ii) pursuant to beneficiary designation procedures approved by
the Company. Except to the extent permitted by the foregoing sentence, during
the Optionee's lifetime the Option is exercisable only by the Optionee or the
Optionee's Legal Representative. Except to the extent permitted by the
foregoing, the Option may not be sold, transferred, assigned, pledged,
hypothecated, encumbered or otherwise disposed of (whether by operation of law
or otherwise) or be subject to execution, attachment or similar process. Upon
any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of the Option, the Option and all rights hereunder shall
immediately become null and void.
3.2. Withholding Taxes. (a) As a condition precedent to the
-----------------
delivery of Stock upon exercise of the Option, the Optionee shall, upon request
by the Company, pay to the Company in addition to the purchase price of the
shares, such amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay over as
income or other withholding taxes (the "Required Tax Payments") with respect to
such exercise of the Option. If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.
(b) The Optionee may elect to satisfy his or her obligation to
advance the Required Tax Payments by any of the following means: (1) a cash
payment to the Company pursuant to Section 3.2(a), (2) delivery (either actual
delivery or by attestation procedures established by the Company) to the Company
of previously owned whole shares of Stock (which the Optionee has good title,
free and clear of all liens and encumbrances) having an aggregate Fair Market
Value, determined as of the date the obligation to withhold or pay taxes first
arises in connection with the Option (the "Tax Date"), equal to the Required Tax
Payments, (3) authorizing the Company to withhold whole shares of Stock which
would otherwise be delivered to the Optionee upon exercise of the Option having
an aggregate Fair Market Value, determined as of the Tax Date, equal to the
Required Tax Payments, (4) a cash payment by a broker-dealer acceptable to the
Company to whom the Optionee has submitted an irrevocable notice of exercise,
except as prohibited by Section 402 of the Sarbanes-Oxley Act of 2002 or (5) any
combination of (1), (2) and (3). The Company shall have sole discretion to
disapprove of an election pursuant to any of clauses (2)-(5). Any fraction of a
share of Stock which would be required to satisfy such obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Optionee.
No registration in book-entry form of a share of Stock shall be made and no
certificate representing a share of Stock shall be delivered until the Required
Tax Payments have been satisfied in full.
3.3. Adjustment. In the event of any stock split, stock
----------
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares,
4
<PAGE>
liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a regular cash dividend, the number and class of securities subject to the
Option and the purchase price per security shall be appropriately adjusted by
the Committee, such adjustments to be made without an increase in the aggregate
Exercise Price. The decision of the Committee regarding any such adjustment
shall be final, binding and conclusive.
3.4. Compliance with Applicable Law. The Option is subject to
------------------------------
the condition that if the listing, registration or qualification of the shares
subject to the Option upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the purchase
or delivery of shares hereunder, the Option may not be exercised, in whole or in
part, unless such listing, registration, qualification, consent or approval
shall have been effected or obtained, free of any conditions not acceptable to
the Company. The Company agrees to use reasonable efforts to effect or obtain
any such listing, registration, qualification, consent or approval.
3.5. Delivery of Certificates. Upon the exercise of the
------------------------
Option, in whole or in part, the Company shall provide for the registration in
book-entry form in the Optionee's name the number of shares purchased against
full payment therefor. The Company shall pay all original issue or transfer
taxes and all fees and expenses incident to such delivery, except as otherwise
provided in Section 3.2.
3.6. Option Confers No Rights as Shareholder. The Optionee
---------------------------------------
shall not be entitled to any privileges of ownership with respect to shares of
Stock subject to the Option unless and until purchased and delivered upon the
exercise of the Option, in whole or in part, and the Optionee becomes a
shareholder of record with respect to such delivered shares; and the Optionee
shall not be considered a shareholder of the Company with respect to any such
shares not so purchased and delivered.
3.7. Option Confers No Rights to Continued Employment. In no
------------------------------------------------
event shall the granting of the Option or its acceptance by the Optionee give or
be deemed to give the Optionee any right to continued employment by or service
with the Company or any affiliate of the Company.
3.8. Decisions of Board or a Committee of the Board. The Board
----------------------------------------------
or the Committee shall have the right to resolve all questions which may arise
in connection with the Option or its exercise. Any interpretation, determination
or other action made or taken by the Board or the Committee regarding the Plan
or this Agreement shall be final, binding and conclusive.
3.9. Company to Reserve Shares. The Company shall at all times
-------------------------
prior to the expiration or termination of the Option reserve and keep available,
either in its treasury or out of its authorized but unissued shares of Stock,
the full number of shares subject to the Option from time to time.
5
<PAGE>
3.10. Agreement Subject to the Plan. This Agreement is subject
-----------------------------
to the provisions of the Plan, and shall be interpreted in accordance therewith.
The Optionee hereby acknowledges receipt of a copy of the Plan.
4. Miscellaneous Provisions.
------------------------
4.1. Designation as Nonqualified Stock Option. The Option is
----------------------------------------
hereby designated as not constituting an "incentive stock option" within meaning
of section 422 of the Code; this Agreement shall be interpreted and treated
consistently with such designation.
4.2. Meaning of Certain Terms. (a) As used herein, the term
------------------------
"Disability" shall mean Optionee's absence from Optionee's duties with the
Company or its affiliated companies on a full-time basis for at least 180
consecutive days as a result of Optionee's incapacity due to physical or mental
illness.
(b) As used herein, employment by the Company shall include
employment by a corporation which is a "subsidiary corporation" of the Company,
as such term is defined in section 424 of the Code. References in this Agreement
to sections of the Code shall be deemed to refer to any successor section of the
Code or any successor internal revenue law.
(c) As used herein, the term "Legal Representative" shall
include an executor, administrator, legal representative, guardian or similar
person and the term "Permitted Transferee" shall include any transferee (i)
pursuant to a transfer permitted under Section 5.6 of the Plan and Section 3.1
hereof or (ii) designated pursuant to beneficiary designation procedures
approved by the Company.
4.3. Modification, Waiver and Invalidity. The parties may
-----------------------------------
modify this Agreement only by written instrument signed by each of the parties
hereto. Failure by either party to enforce a provision of this Agreement shall
not constitute a waiver of that or any provision of this Agreement. The
invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement.
4.4. Successors. This Agreement shall be binding upon and
----------
inure to the benefit of any successor or successors of the Company and any
person or persons who shall, upon the death of the Optionee, acquire any rights
hereunder in accordance with this Agreement or the Plan.
4.5. Notices. All notices, requests or other communications
-------
provided for in this Agreement shall be made, if to the Company, to the
Corporate Secretary at The ServiceMaster Company, 3250 Lacey Road, Suite 600,
Downers Grove, IL 60515, and if to the Optionee, to the address of the Optionee
contained in the Company's records. All notices, requests or other
communications provided for in this Agreement shall be made in writing either
(a) by personal delivery, (b) by facsimile with confirmation of receipt, (c) by
mailing in the United States mails to the last known address of the party
entitled thereto, (d) by express courier service or (e) electronic mail delivery
system. The notice, request or other communication shall be deemed to be
received upon personal delivery, upon confirmation of receipt of facsimile
6
<PAGE>
transmission, upon receipt by the party entitled thereto if by United States
mail, express courier service or return receipt of electronic mail delivery
system; provided, however, that if a notice, request or other communication sent
to the Company is not received during regular business hours, it shall be deemed
to be received on the next succeeding business day of the Company.
4.6. Governing Law. This Agreement, the Option and all
--------------
determinations made and actions taken pursuant hereto and thereto, to the extent
not governed by the laws of the United States, shall be governed by the laws of
the State of Delaware and construed in accordance therewith without giving
effect to principles of conflicts of law.
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>exh10-25.txt
<DESCRIPTION>RESTRICTED STOCK AWARD AGREEMENT
<TEXT>
EXHIBIT 10.25
THE SERVICEMASTER COMPANY
RESTRICTED STOCK AWARD AGREEMENT
__________________, 2004
The ServiceMaster Company (the "Company") hereby grants to
[insert name] (the "Holder") as of ___________, 2004 (the "Grant Date"),
pursuant to the provisions of the ServiceMaster 2003 Equity Incentive Plan (the
"Plan"), a restricted stock award (the "Award) of [MERGE FIELD] shares of the
Company's common stock, $.01 par value ("Stock"), upon and subject to the
restrictions, terms and conditions set forth below. Capitalized terms not
defined herein shall have the meanings specified in the Plan.
1. Award Subject to Acceptance of Agreement. The Award shall be null and
------------------------------------------
void unless the Holder shall accept this Agreement by executing it in the space
provided below and returning it to the Company.
2. Rights as a Stockholder. The Holder shall have the right to vote the
------------------------
shares of Stock subject to the Award and to receive dividends and other
distributions thereon unless and until, and only to the extent, such shares are
forfeited pursuant to Paragraph 4 hereof; provided, however, that a dividend or
other distribution with respect to shares of Stock (including, without
limitation, a stock dividend or stock split), other than a regular cash
dividend, shall be subject to the same restrictions as the shares of Stock to
which such dividend or other distribution was made.
3. Custody and Delivery of Certificates Representing Shares. The Company
----------------------------------------------------------
shall hold the shares of Stock subject to the Award in book-entry form until
such Award shall have vested, in whole or in part, pursuant to Paragraph 4
hereof, and the Company shall as soon thereafter as practicable, subject to
Section 6.2, provide for the registration in book-entry form in the Holder's
name of the vested shares.
4. Restriction Period and Vesting.
------------------------------
(a) The Award shall vest in the following increments on each anniversary of the
Grant Date, or earlier pursuant to Section 4(b) hereof (the "Restriction
Period") or Section 5.8 of the Plan.
Vesting Date Number of Shares Vesting
------------ ------------------------
__________, 2005
__________, 2006
__________, 2007
__________, 2008
__________, 2009
(b) If the Holder's employment by the Company terminates by reason of
Disability or death, the Award shall become fully vested as of the effective
date of the Holder's termination of employment or the date of death, as the case
may be.
<PAGE>
(c) If the Holder's employment by the Company terminates for any reason
other than Disability or death, the portion of the Award which is not vested as
of the effective date of the Holder's termination of employment, shall be
forfeited by the Holder and such portion shall be cancelled by the Company.
5. Termination of Award. (a) Notwithstanding any provision of this
----------------------
Agreement, if at any time prior to the date that is one year after the date of
vesting of all or any portion of the Award, the Holder:
(1) directly or indirectly (whether as owner, stockholder,
director, officer, employee, principal, agent, consultant, independent
contractor or otherwise), in North America or any other geographic area
in which the Company is then conducting business, owns, manages,
operates, controls, participates in, performs services for, or
otherwise carries on, a business similar to or competitive with the
business conducted by the Company or any Subsidiary; or
(2) directly or indirectly attempts to induce any employee of
the Company to terminate or abandon his or her employment for any
purpose whatsoever or any attempt directly or indirectly to solicit the
trade or business of any current or prospective commercial customer,
supplier or partner of the Company; or
(3) directly or indirectly engages in any activity which is
contrary, inimical or harmful to the interests of the Company,
including but not limited to (i) violations of Company policies (ii)
disclosure or misuse of any confidential information or trade secrets
of the Company or a Subsidiary (iii) participation in any activity not
approved by the Committee which could reasonably be foreseen as
contributing to or resulting in a Change in Control of the Company and
(iv) conduct related to employment for which either criminal or civil
penalties may be sought;
then the Holder shall pay the Company, within five business days of receipt by
the Holder of a written demand therefor, an amount in cash determined by
multiplying the number of shares of Stock subject to the Award which vested
within the one-year period described above by the Fair Market Value of a share
of Stock, determined as of the date of vesting.
(b) The Holder may be released from the Holder's obligations
under Section 5(a) only if and to the extent the Committee determines in its
sole discretion that such a release is in the best interests of the Company.
(c) The Holder agrees that by executing this Agreement the
Holder authorizes the Company and its Subsidiaries to deduct any amount or
amounts owed by the Holder pursuant to Section 5(a) from any amounts payable by
the Company or any Subsidiary to the Holder, including, without limitation, any
amount payable to the Holder as salary, wages, vacation pay or bonus. This right
of setoff shall not be an exclusive remedy and the Company's or a Subsidiary's
election not to exercise this right of setoff with respect to any amount payable
to the Holder shall not constitute a waiver of this right of setoff with respect
to any other amount payable to the Holder or any other remedy.
(d) In the event that the Holder shall forfeit all or a portion
of the shares of Stock subject to the Award, the Holder shall, upon the
Company's request, promptly return this
2
<PAGE>
Agreement to the Company for full or partial cancellation,
as the case may be. Such cancellation shall be effective regardless of whether
the Holder returns this Agreement.
6. Additional Terms and Conditions of Award.
----------------------------------------
6.1. Nontransferability of Award. During the Restriction Period, the shares
---------------------------
of Stock subject to the Award and not then vested may not be transferred by the
Holder other than (i) by will or the laws of descent and distribution or (ii)
pursuant to beneficiary designation procedures approved by the Company. Except
to the extent permitted by the foregoing sentence, during the Restriction
Period, the shares of Stock subject to the Award and not then vested may not be
sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise
disposed of (whether by operation of law or otherwise) or be subject to
execution, attachment or similar process. Upon any attempt to so sell, transfer,
assign, pledge, hypothecate or encumber, or otherwise dispose of such shares,
the Award shall immediately become null and void.
6.2. Withholding Taxes. (a) As a condition precedent to the delivery to the
-----------------
Holder of any shares of Stock subject to the Award, the Holder shall, upon
request by the Company, pay to the Company such amount of cash as the Company
may be required, under all applicable federal, state, local or other laws or
regulations, to withhold and pay over as income or other withholding taxes (the
"Required Tax Payments") with respect to the Award. If the Holder shall fail to
advance the Required Tax Payments after request by the Company, the Company may,
in its discretion, deduct any Required Tax Payments from any amount then or
thereafter payable by the Company or a Subsidiary to the Holder.
(b) The Holder may elect to satisfy his or her obligation to advance the
Required Tax Payments by any of the following means: (1) a cash payment to the
Company pursuant to Section 6.2(a), (2) delivery (either actual delivery or by
attestation procedures established by the Company) to the Company of previously
owned whole shares of Stock (which the Holder has good title, free and clear of
all liens and encumbrances) having a Fair Market Value, determined as of the
date the obligation to withhold or pay taxes first arises in connection with the
Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the
Company to withhold from the shares of Stock otherwise to be delivered to the
Holder pursuant to the Award, a number of whole shares of Stock having a Fair
Market Value, determined as of the Tax Date, equal to the Required Tax Payments,
(4) a cash payment by a broker-dealer acceptable to the Company through whom the
Holder has sold the shares with respect to which the Required Tax Payments have
arisen, except as prohibited by Section 402 of the Sarbanes-Oxley Act of 2002 or
(5) any combination of (1), (2) and (3). The Committee shall have sole
discretion to disapprove of an election pursuant to any of clauses (2)-(5).
Shares of Stock to be delivered or withheld may not have a Fair Market Value in
excess of the minimum amount of the Required Tax Payments. Any fraction of a
share of Stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Holder. No
registration in book-entry form of a share of Stock shall be made and no
certificate representing a share of Stock shall be delivered until the Required
Tax Payments have been satisfied in full.
6.3 Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities
3
<PAGE>
subject to the Award shall be appropriately adjusted by the Committee. The
decision of the Committee regarding any such adjustment shall be final, binding
and conclusive.
6.4 Compliance with Applicable Law. The Award is subject to the condition
--------------------------------
that if the listing, registration or qualification of the shares subject to the
Award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the vesting or delivery of
shares hereunder, the shares of Stock subject to the Award shall not vest or be
delivered, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained, free of
any conditions not acceptable to the Company. The Company agrees to use
reasonable efforts to effect or obtain any such listing, registration,
qualification, consent or approval.
6.5 Original Issue or Transfer Taxes. The Company shall pay all original
----------------------------------
issue or transfer taxes and all fees and expenses incident to such delivery,
except as otherwise provided in Section 6.2.
6.6 Award Confers No Rights to Continued Employment. In no event shall the
-----------------------------------------------
granting of the Award or its acceptance by the Holder give or be deemed to give
the Holder any right to continued employment by the Company or any affiliate of
the Company.
6.7 Decisions of Board or a Committee of the Board. The Board or the
--------------------------------------------------
Committee shall have the right to resolve all questions which may arise in
connection with the Award. Any interpretation, determination or other action
made or taken by the Board or the Committee regarding the Plan or this Agreement
shall be final, binding and conclusive.
6.8 Agreement Subject to the Plan. This Agreement is subject to the
-------------------------------
provisions of the Plan and shall be interpreted in accordance therewith. The
Holder hereby acknowledges receipt of a copy of the Plan.
7. Miscellaneous Provisions.
------------------------
7.1 Meaning of Certain Terms. (a) As used herein, the term "vest" shall
-------------------------
mean no longer subject to forfeiture.
(b) As used herein, "Disability" shall mean Holder's absence from Holder's
duties with the Company or its affiliated companies on a full-time basis for at
least 180 consecutive days as a result of Holder's incapacity due to physical or
mental illness.
(c) As used herein, employment by the Company shall include employment by a
corporation which is a "subsidiary corporation" of the Company, as such term is
defined in section 424 of the Code. References in this Agreement to sections of
the Code shall be deemed to refer to any successor section of the Code or any
successor internal revenue law.
7.2 Modification, Waiver and Invalidity. The parties may modify this
-------------------------------------
Agreement only by written instrument signed by each of the parties hereto.
Failure by either party to enforce a provision of this Agreement shall not
constitute a waiver of that or any provision of this Agreement. The invalidity
or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement.
4
<PAGE>
7.3 Successors. This Agreement shall be binding upon and inure to the
----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Holder, acquire any rights hereunder in
accordance with this Agreement or the Plan.
7.4 Notices. All notices, requests or other communications provided for in
-------
this Agreement shall be made, if to the Company, to the Corporate Secretary at
The ServiceMaster Company, 3250 Lacey Road, Suite 600, Downers Grove, Illinois
60515, and if to the Holder, to the address of the Holder contained in the
Company's records. All notices, requests or other communications provided for in
this Agreement shall be made in writing either (a) by personal delivery, (b) by
facsimile with confirmation of receipt, (c) by mailing in the United States
mails to the last known address of the party entitled thereto, (d) by express
courier service or (e) electronic mail delivery system. The notice, request or
other communication shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile transmission, or upon receipt by the party
entitled thereto if by United States mail, express courier service or return
receipt of electronic delivery system; provided, however, that if a notice,
request or other communication sent to the Company is not received during
regular business hours, it shall be deemed to be received on the next succeeding
business day of the Company.
7.5 Governing Law. This Agreement, the Award and all determinations made
-------------
and actions taken pursuant hereto and thereto, to the extent not otherwise
governed by the laws of the United States, shall be governed by the laws of the
State of Delaware and construed in accordance therewith without giving effect to
conflicts of laws principles.
7.6 Counterparts. This Agreement may be executed in two counterparts, each
------------
of which shall be deemed an original and both of which together shall constitute
one and the same instrument.
THE SERVICEMASTER COMPANY
By:
----------------------------------
Name: Sandra L. Groman
-----------------------
Title: Corporate Secretary
-----------------------
Accepted this ___ day of , 2004.
----------
- ------------------------------------------------------
-Holder-
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>exh10-26.txt
<DESCRIPTION>STOCK APPRECIATION RIGHT AGREEMENT
<TEXT>
EXHIBIT 10.26
THE SERVICEMASTER COMPANY
STOCK APPRECIATION RIGHT AGREEMENT
______________, 2004
The ServiceMaster Company (the "Company") hereby grants to the
Holder as of __________________, 2004 (the "Grant Date"), pursuant to the
provisions of the ServiceMaster 2003 Equity Incentive Plan, (the "Plan") a
free-standing stock appreciation right ("SAR") with respect to the number of
shares of its common stock, $0.01 par value ("Stock") specified in the Term
Sheet at the Base Price per SAR upon and subject to the terms and conditions set
forth below and in the Term Sheet. References to employment shall also mean an
agency or independent contractor relationship and references to employment by
the Company shall also mean employment by a Subsidiary. Capitalized terms not
defined herein shall have the meanings specified in the Term Sheet or the Plan.
1. SAR Subject to Acceptance of Agreement. The SAR shall be null and void
---------------------------------------
unless the Holder shall accept this Agreement by executing one copy of the
related Term Sheet and returning an original execution copy to the Company.
2. Time and Manner of Exercise of SAR.
-----------------------------------
2.1. Maximum Term of SAR. In no event may the SAR be exercised, in whole or
-------------------
in part, after the Expiration Date.
2.2. Exercise of SAR. (a) Except as otherwise provided by Section 2.2(b)
---------------
and by Section 5.8 of the Plan, the SAR shall become exercisable in accordance
with the Exercise Schedule set forth in the Term Sheet.
(b) If the Holder's employment with the Company terminates by reason of
Disability or death, the SAR shall be immediately exercisable with respect to
all of the shares of Stock subject to the SAR on the effective date of the
Holder's termination of employment or date of death and may thereafter be
exercised by the Holder or the Holder's Legal Representative or Permitted
Transferees, as the case may be, until and including the earliest to occur of
(i) the date which is two years after the effective date of the Holder's
termination of employment or date of death and (ii) the Expiration Date.
(c) If the Holder's employment with the Company terminates after a minimum
of fifteen years of employment (fifteen years need not be consecutive) with the
Company or a combined age and years of service totaling 65 ("Retirement"), the
SAR shall continue in accordance with its terms and, to the extent the SAR shall
be or become exercisable with respect to the shares of Stock subject to the SAR,
may thereafter be exercised by the Holder or the Holder's Legal Representative
until the Expiration Date.
(d) If the Holder's employment with the Company terminates for any reason
other than Disability, death or Retirement, the SAR shall be exercisable only to
the extent it is exercisable on the effective date of the Holder's termination
of employment and may thereafter be exercised by the Holder or the Holder's
Legal Representative until and including the earliest
<PAGE>
to occur of (i) the date
which is six months after the effective date of the Holder's termination of
employment and (ii) the Expiration Date; provided that if the Holder's
employment is terminated for Gross Misconduct, the SAR shall terminate
automatically on the effective date of the Holder's termination of employment.
Gross Misconduct means the commission of any act of fraud, embezzlement or
dishonesty by the Holder, any unauthorized use or disclosure by the Holder of
confidential information or trade secrets of the Company or any Subsidiary, or
any other intentional misconduct by the Holder adversely affecting the business
or affairs of the Company or any Subsidiary in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Company or any Subsidiary may consider as grounds for the dismissal or
discharge of the Holder or any other individual in the employment of the Company
or any Subsidiary.
(e) If the Holder dies during the post-employment exercise period pursuant
to Section 2.2(b) following termination of employment by reason of Disability,
the SAR shall be exercisable only to the extent it is exercisable on the date of
death, and may thereafter be exercised by the Holder's Legal Representative or
Permitted Transferees, as the case may be, until the earlier to occur of (i) two
years after the effective date of the Holder's termination of employment and
(ii) the Expiration Date.
(f) If the Holder dies following termination of employment by reason of
Retirement and prior to the Expiration Date, the SAR shall be exercisable only
to the extent it is exercisable on the date of death, and may thereafter be
exercised by the Holder's Legal Representative or Permitted Transferees, as the
case may be, until the earliest to occur of (i) two years after the date of
death and (ii) the Expiration Date.
(g) If the Holder dies during post-employment exercise period determined
pursuant to Section 2.2(d) following termination of employment for any reason
other than Disability, Retirement or Gross Misconduct, the SAR shall be
exercisable only to the extent it is exercisable on the date of death, and may
thereafter be exercised by the Holder's Legal Representative or Permitted
Transferees, as the case may be, until the earliest to occur of (i) six months
after the effective date of the Holder's termination of employment and (ii) the
Expiration Date.
2.3. Method of Exercise. Subject to the limitations set forth in this
-------------------
Agreement, the SAR may be exercised by the Holder (1) by giving written notice
to the Company specifying the whole number of vested and exercisable shares of
Stock with respect to which the SAR is being exercised and (2) by executing such
documents as the Company may reasonably request.
2.4 Delivery of Certificates Representing Stock. Upon exercise of the SAR,
--------------------------------------------
in whole or in part, the Company shall (1) provide for the registration in
book-entry form in the Holder's name or (2) deliver to the Holder a stock
certificate representing a whole number of shares of Stock equal in value to the
excess of the Fair Market Value of one share of Stock as of the date of exercise
over the Base Price, multiplied by the number of shares of Stock as to which the
SAR is being exercised. The Company shall pay all original issue or transfer
taxes and all fees and expenses incident to such delivery, except as set
otherwise provided in Section 3.2.
2
<PAGE>
2.5. Termination of SAR and Forfeiture of SAR Gain. (a) Notwithstanding the
---------------------------------------------
Term Sheet or any provision of this Agreement, if at any time prior to the date
that is one year after the date of exercise of all or any portion of the SAR,
the Holder:
(1) directly or indirectly (whether as owner, stockholder,
director, officer, employee, principal, agent, consultant, independent
contractor, partner or otherwise), in North America or any other
geographic area in which the Company is then conducting business, owns,
manages, operates, controls, participates in, performs services for, or
otherwise carries on, a business similar to or competitive with the
business conducted by the Company or any Subsidiary; or
(2) directly or indirectly attempts to induce any employee of
the Company to terminate or abandon his or her employment for any
purpose whatsoever or any attempt directly or indirectly to solicit the
trade or business of any current or prospective customer, supplier or
partner of the Company; or
(3) directly or indirectly engages in any activity which is
contrary, inimical or harmful to the interests of the Company,
including but not limited to (i) violations of Company policies (ii)
disclosure or misuse of any confidential information or trade secrets
of the Company or a Subsidiary (iii) participation in any activity not
approved by the Committee which could reasonably be foreseen as
contributing to or resulting in a Change in Control of the Company and
(iv) conduct related to employment for which either criminal or civil
penalties may be sought;
then the SAR shall terminate automatically on the date the Holder engages in
such activity and the Holder shall pay the Company, within five business days of
receipt by the Holder of a written demand therefor, an amount in cash determined
by multiplying the number of shares of Stock as to which the SAR was exercised
within the one-year period described above by the difference between (i) the
Fair Market Value of a share of Stock on the date of such exercise and (ii) the
Base Price per SAR (without reduction for any shares of Stock withheld by the
Company pursuant to Section 3.2).
(b) The Holder may be released from the Holder's obligations
under Section 2.5(a) only if and to the extent the Committee determines in its
sole discretion that such a release is in the best interests of the Company.
(c) The Holder agrees that by executing this Agreement the
Holder authorizes the Company and its Subsidiaries to deduct any amount or
amounts owed by the Holder pursuant to Section 2.5(a) from any amounts payable
by the Company or any Subsidiary to the Holder, including, without limitation,
any amount payable to the Holder as salary, wages, vacation pay or bonus. This
right of setoff shall not be an exclusive remedy and the Company's or a
Subsidiary's election not to exercise this right of setoff with respect to any
amount payable to the Holder shall not constitute a waiver of this right of
setoff with respect to any other amount payable to the Holder or any other
remedy.
3
<PAGE>
3. Additional Terms and Conditions of SAR.
--------------------------------------
3.1. Nontransferability of SAR. The SAR may not be transferred by the
--------------------------
Holder other than (i) by will or the laws of descent and distribution or (ii)
pursuant to beneficiary designation procedures approved by the Company. Except
to the extent permitted by the foregoing sentence, during the Holder's lifetime
the SAR is exercisable only by the Holder or the Holder's Legal Representative.
Except to the extent permitted by the foregoing, the SAR may not be sold,
transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed
of (whether by operation of law or otherwise) or be subject to execution,
attachment or similar process. Upon any attempt to so sell, transfer, assign,
pledge, hypothecate, encumber or otherwise dispose of the SAR, the SAR and all
rights hereunder shall immediately become null and void.
3.2. Withholding Taxes. As a condition precedent to the delivery of Stock
-----------------
upon exercise of the SAR, the Company shall withhold whole shares of Stock which
would otherwise be delivered to the Holder upon exercise of the SAR having an
aggregate Fair Market Value, determined as of the date the obligation to
withhold taxes first arises in connection with the SAR, equal to all applicable
federal, state, local or other laws and regulations ("Required Tax Payments").
No registration in book-entry form of a share of Stock shall be made and no
certificate representing a share of Stock shall be delivered until the Required
Tax Payments have been satisfied in full.
3.3. Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities subject to the SAR and the Base
Price per SAR shall be appropriately adjusted by the Committee, such adjustments
to be made without an increase in the aggregate Base Price. The decision of the
Committee regarding any such adjustment shall be final, binding and conclusive.
3.4. Compliance with Applicable Law. The SAR is subject to the condition
--------------------------------
that if the listing, registration or qualification of the shares subject to the
SAR upon any securities exchange or under any law, or the consent or approval of
any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the purchase or delivery of
shares hereunder, the SAR may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company agrees to use reasonable efforts to effect or obtain any such listing,
registration, qualification, consent or approval.
3.5. SAR Confers No Rights as Shareholder. The SAR shall not be entitled to
------------------------------------
any privileges of ownership with respect to shares of Stock subject to the SAR
unless and until purchased and delivered upon the exercise of the SAR, in whole
or in part, and the Holder becomes a shareholder of record with respect to such
delivered shares; and the Holder shall not be considered a shareholder of the
Company with respect to any such shares not so purchased and delivered.
4
<PAGE>
3.6. SAR Confers No Rights to Continued Employment. In no event shall the
----------------------------------------------
granting of the SAR or its acceptance by the Holder give or be deemed to give
the Holder any right to continued employment by or service with the Company or
any affiliate of the Company.
3.7. Decisions of Board or a Committee of the Board. The Board or the
--------------------------------------------------
Committee shall have the right to resolve all questions which may arise in
connection with the SAR or its exercise. Any interpretation, determination or
other action made or taken by the Board or the Committee regarding the Plan or
this Agreement shall be final, binding and conclusive.
3.8. Company to Reserve Shares. The Company shall at all times prior to the
-------------------------
expiration or termination of the SAR reserve and keep available, either in its
treasury or out of its authorized but unissued shares of Stock, the full number
of shares subject to the SAR from time to time.
3.9. Agreement Subject to the Plan. This Agreement is subject to the
-------------------------------
provisions of the Plan, and shall be interpreted in accordance therewith. The
Holder hereby acknowledges receipt of a copy of the Plan.
4. Miscellaneous Provisions.
------------------------
4.1. Meaning of Certain Terms. (a) As used herein, the term "Disability"
------------------------
shall mean Holder's absence from Holder's duties with the Company or its
affiliated companies on a full-time basis for at least 180 consecutive days as a
result of Holder's incapacity due to physical or mental illness.
(b) As used herein, employment by the Company shall include
employment by a corporation which is a "subsidiary corporation" of the Company,
as such term is defined in section 424 of the Code. References in this Agreement
to sections of the Code shall be deemed to refer to any successor section of the
Code or any successor internal revenue law.
(c) As used herein, the term "Legal Representative" shall
include an executor, administrator, legal representative, guardian or similar
person and the term "Permitted Transferee" shall include any transferee (i)
pursuant to a transfer permitted under Section 5.6 of the Plan and Section 3.1
hereof or (ii) designated pursuant to beneficiary designation procedures
approved by the Company.
4.2. Modification, Waiver and Invalidity. The parties may modify this
-------------------------------------
Agreement only by written instrument signed by each of the parties hereto.
Failure by either party to enforce a provision of this Agreement shall not
constitute a waiver of that or any provision of this Agreement. The invalidity
or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement.
4.3. Successors. This Agreement shall be binding upon and inure to the
----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Holder, acquire any rights hereunder in
accordance with this Agreement or the Plan.
5
<PAGE>
4.4. Notices. All notices, requests or other communications provided for in
-------
this Agreement shall be made, if to the Company, to the Corporate Secretary at
The ServiceMaster Company, 3250 Lacey Road, Suite 600, Downers Grove, IL 60515,
and if to the Holder, to the address of the Holder contained in the Company's
records. All notices, requests or other communications provided for in this
Agreement shall be made in writing either (a) by personal delivery, (b) by
facsimile with confirmation of receipt, (c) by mailing in the United States
mails to the last known address of the party entitled thereto, (d) by express
courier service or (e) electronic mail delivery system. The notice, request or
other communication shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile transmission, upon receipt by the party
entitled thereto if by United States mail, express courier service or return
receipt of electronic mail delivery system; provided, however, that if a notice,
request or other communication sent to the Company is not received during
regular business hours, it shall be deemed to be received on the next succeeding
business day of the Company.
4.5. Governing Law. This Agreement, the SAR and all determinations made and
-------------
actions taken pursuant hereto and thereto, to the extent not governed by the
laws of the United States, shall be governed by the laws of the State of
Delaware and construed in accordance therewith without giving effect to
principles of conflicts of law.
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>exh10-32.txt
<DESCRIPTION>STOCK OPTION AGREEMENT JONATHAN P. WARD
<TEXT>
EXHIBIT 10.32
THE SERVICEMASTER COMPANY
STOCK OPTION AGREEMENT
February 8, 2002
The Company hereby grants to the Optionee as of the Grant
Date, pursuant to the provisions of the Plan, the Option to purchase the number
of Option Shares specified in the Term Sheet at the Exercise Price per share
upon and subject to the terms and conditions set forth below and in the Term
Sheet. References to employment shall also mean an agency or independent
contractor relationship and references to employment by the Company shall also
mean employment by a Subsidiary. Capitalized terms not defined herein shall have
the meanings specified in the Term Sheet or the Plan.
1. Option Subject to Acceptance of Agreement. The Option shall be null and
-----------------------------------------
void unless the Optionee shall accept this Agreement by executing one copy of
the related Term Sheet and returning an original execution copy to the Company.
2. Time and Manner of Exercise of Option.
-------------------------------------
2.1. Maximum Term of Option. In no event may the Option be exercised, in
----------------------
whole or in part, after the Expiration Date.
2.2. Exercise of Option. (a) Except as otherwise provided by Sections
-------------------
2.2(b) hereof and by Section 11 of the Plan, the Option shall become exercisable
in accordance with the Exercise Schedule set forth in the Term Sheet.
(b) If the Optionee's employment with the Company terminates by reason of
Disability or death, the Option shall be immediately exercisable with respect to
all of the Option Shares on the effective date of the Optionee's termination of
employment or date of death and may thereafter be exercised by the Optionee or
the Optionee's Legal Representative or Permitted Transferees, as the case may
be, until and including the earliest to occur of (i) the date which is two years
after the effective date of the Optionee's termination of employment or date of
death and (ii) the Expiration Date.
(c) If the Optionee's employment with the Company terminates by reason of
retirement on or after age 63 or after a minimum of fifteen years of employment
(fifteen years need not be consecutive) with the Company ("Retirement"), the
Option shall continue in accordance with its terms and, to the extent the Option
shall be or become exercisable with respect to the Option Shares, may thereafter
be exercised by the Optionee or the Optionee's Legal Representative until the
Expiration Date.
(d) If the Optionee's employment with the Company terminates for any reason
other than Disability, death or Retirement, the Option shall be exercisable only
to the extent it is exercisable on the effective date of the Optionee's
termination of employment and may thereafter be exercised by the Optionee or the
Optionee's Legal Representative until and
<PAGE>
including the earliest to occur of (i)
the date which is six months after the effective date of the Optionee's
termination of employment and (ii) the Expiration Date; provided that if the
Optionee's employment is terminated for Gross Misconduct, the Option shall
terminate automatically on the effective date of the Optionee's termination of
employment. Gross Misconduct means the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by the Optionee of confidential information or trade secrets of the Company or
any Subsidiary, or any other intentional misconduct by the Optionee adversely
affecting the business or affairs of the Company or any Subsidiary in a material
manner. The foregoing definition shall not be deemed to be inclusive of all the
acts or omissions which the Company or any Subsidiary may consider as grounds
for the dismissal or discharge of the Optionee or any other individual in the
employment of the Company or any Subsidiary.
(e) If the Optionee dies during the post-employment exercise period
pursuant to Section 2.2(b) following termination of employment by reason of
Disability, the Option shall be exercisable only to the extent it is exercisable
on the date of death, and may thereafter be exercised by the Optionee's Legal
Representative or Permitted Transferees, as the case may be, until the earlier
to occur of (i) two years after the effective date of the Optionee's termination
of employment and (ii) the Expiration Date.
(f) If the Optionee dies following termination of employment by reason of
Retirement and prior to the Expiration Date, the Option shall be exercisable
only to the extent it is exercisable on the date of death, and may thereafter be
exercised by the Optionee's Legal Representative or Permitted Transferees, as
the case may be, until the earliest to occur of (i) two years after the date of
death and (ii) the Expiration Date.
(g) If the Optionee dies during post-employment exercise period determined
pursuant to Section 2.2(d) following termination of employment for any reason
other than Disability, Retirement or Gross Misconduct, the Option shall be
exercisable only to the extent it is exercisable on the date of death, the
Option may thereafter be exercised by the Optionee's Legal Representative or
Permitted Transferees, as the case may be, until the earliest to occur of (i)
six months after the effective date of the Optionee's termination of employment
and (ii) the Expiration Date.
2.3. Method of Exercise. Subject to the limitations set forth in this
-------------------
Agreement, the Option may be exercised by the Optionee (1) by giving written
notice to the Company specifying the number of whole shares of Stock to be
purchased and accompanied by payment therefor in full (or arrangement made for
such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery
(either actual delivery or by attestation procedures established by the Company)
of previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery of such shares or which the Optionee
purchased on the open market and in each case for which the Optionee has good
title, free and clear of all liens and encumbrances) having an aggregate Fair
Market Value, determined as of the date of exercise, equal to the aggregate
purchase price payable pursuant to the Option by reason of such exercise, (iii)
in cash by a broker-dealer acceptable to the Company to whom the Optionee has
submitted an irrevocable notice of exercise or (iv) a combination of (i) and
(ii), and (2) by executing such documents as the Company may reasonably request.
The Company shall have sole discretion to
2
<PAGE>
disapprove of an election pursuant to
any of clauses (ii) - (iv). Any fraction of a share of Stock which would be
required to pay such purchase price shall be rounded down and the Optionee will
be required to pay the fractional share portion to the next whole share. No
certificate representing a share of Stock shall be delivered until the full
purchase price therefor has been paid.
2.4 Termination of Option and Forfeiture of Option Gain. (a)
--------------------------------------------------------------
Notwithstanding the Term Sheet or any provision of this Agreement, if at any
time prior to the date that is one year after the date of exercise of all or any
portion of the Option, the Optionee:
(1) directly or indirectly (whether as owner, stockholder,
director, officer, employee, principal, agent, consultant, independent
contractor, partner or otherwise), in North America or any other
geographic area in which the Company is then conducting business, owns,
manages, operates, controls, participates in, performs services for, or
otherwise carries on, a business similar to or competitive with the
business conducted by the Company or any Subsidiary; or
(2) directly or indirectly attempts to induce any employee of
the Company to terminate or abandon his or her employment for any
purpose whatsoever or any attempt directly or indirectly to solicit the
trade or business of any current or prospective customer, supplier or
partner of the Company; or
(3) directly or indirectly engages in any activity which is
contrary, inimical or harmful to the interests of the Company,
including but not limited to (i) violations of Company policies (ii)
disclosure or misuse of any confidential information or trade secrets
of the Company or a Subsidiary (iii) participation in any activity not
approved by the Board or Chairman which could reasonably be foreseen as
contributing to or resulting in a Change in Control of the Company and
(iv) conduct related to employment for which either criminal or civil
penalties may be sought;
then the Option shall terminate automatically on the date the Optionee engages
in such activity and the Optionee shall pay the Company, within five business
days of receipt by the Optionee of a written demand therefor, an amount in cash
determined by multiplying the number of shares of Stock purchased pursuant to
each exercise of the Option within the one-year period described above (without
reduction for any shares of Stock delivered by the Optionee or withheld by the
Company pursuant to Section 2.3 or Section 3.2) by the difference between (i)
the Fair Market Value of a share of Stock on the date of such exercise and (ii)
the Exercise Price per share of Stock.
(b) The Optionee may be released from the Optionee's obligations under
Section 2.4(a) only if and to the extent the Committee determines in its sole
discretion that such a release is in the best interests of the Company.
(c) The Optionee agrees that by executing this Agreement the Optionee
authorizes the Company and its Subsidiaries to deduct any amount or amounts owed
by the Optionee pursuant to Section 2.4(a) from any amounts payable by the
Company or any Subsidiary to the Optionee, including, without limitation, any
amount payable to the Optionee as
3
<PAGE>
salary, wages, vacation pay or bonus. This
right of setoff shall not be an exclusive remedy and the Company's or a
Subsidiary's election not to exercise this right of setoff with respect to any
amount payable to the Optionee shall not constitute a waiver of this right of
setoff with respect to any other amount payable to the Optionee or any other
remedy.
3. Additional Terms and Conditions of Option.
-----------------------------------------
3.1. Nontransferability of Option. The Option may not be transferred by the
----------------------------
Optionee other than (i) by will or the laws of descent and distribution or (ii)
pursuant to beneficiary designation procedures approved by the Company. Except
to the extent permitted by the foregoing sentence, during the Optionee's
lifetime the Option is exercisable only by the Optionee or the Optionee's Legal
Representative. Except to the extent permitted by the foregoing, the Option may
not be sold, transferred, assigned, pledged, hypothecated, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the
Option, the Option and all rights hereunder shall immediately become null and
void.
3.2. Withholding Taxes. (a) As a condition precedent to the delivery of
------------------
Stock upon exercise of the Option, the Optionee shall, upon request by the
Company, pay to the Company in addition to the purchase price of the shares,
such amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay over as
income or other withholding taxes (the "Required Tax Payments") with respect to
such exercise of the Option. If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.
(b) The Optionee may elect to satisfy his or her obligation to advance the
Required Tax Payments by any of the following means: (1) a cash payment to the
Company pursuant to Section 3.2(a), (2) delivery (either actual delivery or by
attestation procedures established by the Company) to the Company of previously
owned whole shares of Stock (which the Optionee has held for at least six months
prior to the delivery of such shares or which the Optionee purchased on the open
market and in each case for which the Optionee has good title, free and clear of
all liens and encumbrances) having an aggregate Fair Market Value, determined as
of the date the obligation to withhold or pay taxes first arises in connection
with the Option (the "Tax Date"), equal to the Required Tax Payments, (3)
authorizing the Company to withhold whole shares of Stock which would otherwise
be delivered to the Optionee upon exercise of the Option having an aggregate
Fair Market Value, determined as of the Tax Date, equal to the Required Tax
Payments, (4) a cash payment by a broker-dealer acceptable to the Company to
whom the Optionee has submitted an irrevocable notice of exercise or (5) any
combination of (1), (2) and (3). The Company shall have sole discretion to
disapprove of an election pursuant to any of clauses (2)-(5). No certificate
representing a share of Stock shall be delivered until the Required Tax Payments
have been satisfied in full.
3.3. Adjustment. In the event of any change in the capitalization of the
----------
Company (such as a stock split) or a corporate transaction (such as any merger,
consolidation,
4
<PAGE>
separation, including a spin-off, or other distribution of stock
or property of the Company), any reorganization (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code) or any partial or complete liquidation of the Company, the number and
class of securities subject to the Option and the purchase price per security
shall be appropriately adjusted by the Committee without an increase in the
aggregate purchase price. The decision of the Committee regarding any such
adjustment shall be final, binding and conclusive.
3.4. Compliance with Applicable Law. The Option is subject to the condition
------------------------------
that if the listing, registration or qualification of the shares subject to the
Option upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the purchase or delivery of
shares hereunder, the Option may not be exercised, in whole or in part, unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company agrees to use reasonable efforts to effect or obtain any such listing,
registration, qualification, consent or approval.
3.5. Delivery of Certificates. Upon the exercise of the Option, in whole or
------------------------
in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.2.
3.6. Option Confers No Rights as Shareholder. The Optionee shall not be
-----------------------------------------
entitled to any privileges of ownership with respect to shares of Stock subject
to the Option unless and until purchased and delivered upon the exercise of the
Option, in whole or in part, and the Optionee becomes a shareholder of record
with respect to such delivered shares; and the Optionee shall not be considered
a shareholder of the Company with respect to any such shares not so purchased
and delivered.
3.7. Option Confers No Rights to Continued Employment. In no event shall
-------------------------------------------------
the granting of the Option or its acceptance by the Optionee give or be deemed
to give the Optionee any right to continued employment by or service with the
Company or any affiliate of the Company.
3.8. Decisions of Board or Committee. The Board or the Committee shall have
-------------------------------
the right to resolve all questions which may arise in connection with the Option
or its exercise. Any interpretation, determination or other action made or taken
by the Board or the Committee regarding the Plan or this Agreement shall be
final, binding and conclusive.
3.9. Company to Reserve Shares. The Company shall at all times prior to the
-------------------------
expiration or termination of the Option reserve and keep available, either in
its treasury or out of its authorized but unissued shares of Stock, the full
number of shares subject to the Option from time to time.
5
<PAGE>
3.10. Agreement Subject to the Plan. This Agreement is subject to the
-------------------------------
provisions of the Plan, and shall be interpreted in accordance therewith. The
Optionee hereby acknowledges receipt of a copy of the Plan.
4. Miscellaneous Provisions.
------------------------
4.1. Designation as Nonqualified Stock Option. The Option is hereby
--------------------------------------------
designated as not constituting an "incentive stock option" within meaning of
section 422 of the Code; this Agreement shall be interpreted and treated
consistently with such designation.
4.2. Meaning of Certain Terms. (a) As used herein, employment by the
--------------------------
Company shall include employment by a corporation which is a "subsidiary
corporation" of the Company, as such term is defined in section 424 of the Code.
References in this Agreement to sections of the Code shall be deemed to refer to
any successor section of the Code or any successor internal revenue law.
(b) As used herein, the term "Legal Representative" shall include an
executor, administrator, legal representative, guardian or similar person and
the term "Permitted Transferee" shall include any transferee (i) pursuant to a
transfer permitted under Section 6.7 of the Plan and Section 3.1 hereof or (ii)
designated pursuant to beneficiary designation procedures approved by the
Company.
4.3. Successors. This Agreement shall be binding upon and inure to the
----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Optionee, acquire any rights hereunder in
accordance with this Agreement or the Plan.
4.4. Notices. All notices, requests or other communications provided for in
-------
this Agreement shall be made, if to the Company, to the Corporate Secretary at
The ServiceMaster Company, One ServiceMaster Way, Downers Grove, IL 60515, and
if to the Optionee, to the address of the Optionee contained in the Company's
records. All notices, requests or other communications provided for in this
Agreement shall be made in writing either (a) by personal delivery, (b) by
facsimile with confirmation of receipt, (c) by mailing in the United States
mails to the last known address of the party entitled thereto, (d) by express
courier service or (e) electronic mail delivery system. The notice, request or
other communication shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile transmission or upon receipt by the party
entitled thereto if by United States mail, express courier service or return
receipt of electronic mail delivery system; provided, however, that if a notice,
request or other communication sent to the Company is not received during
regular business hours, it shall be deemed to be received on the next succeeding
business day of the Company.
4.5. Governing Law. This Agreement, the Option and all determinations made
-------------
and actions taken pursuant hereto and thereto, to the extent not governed by the
laws of the United States, shall be governed by the laws of the State of
Delaware and construed in accordance therewith without giving effect to
principles of conflicts of law.
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>exh10-33.txt
<DESCRIPTION>RESTRICTED STOCK UNIT AWARD AGREEMENT J.P. WARD
<TEXT>
EXHIBIT 10.33
THE SERVICEMASTER COMPANY
RESTRICTED STOCK UNIT AWARD AGREEMENT
December 18, 2003
The ServiceMaster Company (the "Company") hereby grants to
Jonathan P. Ward (the "Holder") as of December 18, 2003 (the "Grant Date"),
pursuant to the provisions of the ServiceMaster 2003 Equity Incentive Plan (the
"Plan"), a restricted stock unit award of 22,500 restricted stock units (the
"Restricted Stock Units") and a stock unit award of 15,000 stock units (the
"Stock Units") (collectively, the "Award"), each representing the right to
receive one share of the Company's common stock, $.01 par value ("Stock"), upon
and subject to the restrictions, terms and conditions set forth below.
Capitalized terms not defined herein shall have the meanings specified in the
Plan. For purposes of this Agreement, the Award shall be treated as a Restricted
Stock Award. "Stock Unit" means a Restricted Stock Unit that is no longer
subject to forfeiture or a stock unit that is granted or credited without being
subject to forfeiture.
1. Award Subject to Acceptance of Agreement. The Award shall be null and
------------------------------------------
void unless the Holder shall accept this Agreement by executing it in the space
provided below and returning it to the Company.
2. Restriction Period and Vesting.
------------------------------
(a) The 15,000 Stock Units shall be fully vested as of the Grant Date. The
22,500 Restricted Stock Units shall vest in the following increments during the
Restriction Period on each anniversary of the Grant Date, or earlier pursuant to
Section 2(b) hereof or Section 5.8 of the Plan.
Vesting Date Number of Units Vesting
------------- -----------------------
December 31, 2003 7,500
December 31, 2004 7,500
December 31, 2005 7,500
(b) If the Holder's employment by the Company terminates by reason of
Disability or death, all Restricted Stock Units shall become fully vested as of
the effective date of the Holder's termination of employment or the date of
death, as the case may be.
(c) If the Holder's employment by the Company terminates for any reason
other than Disability or death, the portion of the Award which is not vested as
of the effective date of the Holder's termination of employment shall be
forfeited by the Holder and such portion shall be cancelled by the Company.
3. Reinvestment of Dividend Equivalents. On each date the Company pays a
-------------------------------------
cash dividend to record owners of shares of Stock (a "Payment Date"), the Holder
shall be credited on the Payment Date, with additional Stock Units equal to (i)
the product of the total number of Restricted Stock Units and Stock Units
credited to Holder under this Award immediately prior to such Payment Date
multiplied by the dollar amount of the cash dividend paid per share of Stock by
the Company on such Payment Date, divided by (ii) the Fair Market
<PAGE>
Value of a share of Stock on such Payment Date. Any such Stock Units
shall be credited without being subject to forfeiture.
4. Delivery of Certificates Representing Stock Units. (a) The Company shall
-------------------------------------------------
hold the Restricted Stock Units and Stock Units subject to the Award in
book-entry form. Subject to Section 6.2, after the termination of the Holder's
employment by the Company for any reason, the Company shall issue to the Holder
a stock certificate representing a number of shares of Stock equal to the number
of Stock Units credited to Holder under this Award no earlier than January 1 and
no later than January 31 of the year after which the Holder ceases to be a
"covered employee" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986 (the "Issuance Date"); provided, that if there is a record date for
determining the record owners of shares of Stock for the purpose of paying a
cash dividend during the January in which the issuance occurs, the Holder shall
have the right to receive on the related Payment Date either (i) in the event
the Holder is a record owner as of the record date of the shares of Stock to be
issued on the Issuance Date, a cash dividend in an amount equal to the product
of the total number of shares of Stock to be issued under this Award multiplied
by the dollar amount of the cash dividend paid per share of Stock by the Company
or (ii) in the event the Holder is not such a record owner, an amount in cash
equal to the amount of the cash dividend determined under the foregoing clause
(i); and provided, further, that in the event of a Change in Control and
regardless of whether the Holder's employment by the Company has terminated, the
Issuance Date shall be within 10 days of the occurrence of the Change in
Control. The Company shall not be required to issue fractional shares of Stock
upon settlement of the Award.
(b) The Holder shall have no direct or secured claim in any
specific assets of the Company or the shares of Stock to be issued on
the Issuance Date and will have the status of a general unsecured
creditor of the Company.
5. Forfeiture of Restricted Stock Units. (a) Notwithstanding any provision
------------------------------------
of this Agreement, if at any time prior to the date that is one year after the
date of vesting of all or any portion of the Restricted Stock Units, the Holder:
(1) directly or indirectly (whether as owner, stockholder,
director, officer, employee, principal, agent, consultant, independent
contractor or otherwise), in North America or any other geographic area
in which the Company is then conducting business, owns, manages,
operates, controls, participates in, performs services for, or
otherwise carries on, a business similar to or competitive with the
business conducted by the Company or any Subsidiary; or
(2) directly or indirectly attempts to induce any employee of
the Company to terminate or abandon his or her employment for any
purpose whatsoever or any attempt directly or indirectly to solicit the
trade or business of any current or prospective commercial customer,
supplier or partner of the Company; or
(3) directly or indirectly engages in any activity which is
contrary, inimical or harmful to the interests of the Company,
including but not limited to (i) violations of Company policies (ii)
disclosure or misuse of any confidential information or trade secrets
of the Company or a Subsidiary (iii) participation in any activity not
approved by the Committee which could reasonably be foreseen as
contributing to or resulting in a
2
<PAGE>
Change in Control of the Company and
(iv) conduct related to employment for which either criminal or civil
penalties may be sought;
then the Holder shall pay the Company, within five business days of receipt by
the Holder of a written demand therefor, an amount in cash determined by
multiplying the number of Restricted Stock Units subject to the Award which
vested within the one-year period described above by the Fair Market Value of a
share of Stock, determined as of the date of vesting.
(b) The Holder may be released from the Holder's obligations
under Section 5(a) only if and to the extent the Committee determines in its
sole discretion that such a release is in the best interests of the Company.
(c) The Holder agrees that by executing this Agreement the
Holder authorizes the Company and its Subsidiaries to deduct any amount or
amounts owed by the Holder pursuant to Section 5(a) from any amounts payable by
the Company or any Subsidiary to the Holder, including, without limitation, any
amount payable to the Holder as salary, wages, vacation pay or bonus. This right
of setoff shall not be an exclusive remedy and the Company's or a Subsidiary's
election not to exercise this right of setoff with respect to any amount payable
to the Holder shall not constitute a waiver of this right of setoff with respect
to any other amount payable to the Holder or any other remedy.
(d) In the event that the Holder shall forfeit all or a
portion of the Restricted Stock Units subject to the Award, the Holder
shall, upon the Company's request, promptly return this Agreement to the
Company for full or partial cancellation, as the case may be. Such
cancellation shall be effective regardless of whether the Holder returns this
Agreement.
6. Additional Terms and Conditions of Award.
----------------------------------------
6.1. Nontransferability of Award. Prior to the Issuance Date, the Stock
----------------------------
Units and Restricted Stock Units may not be transferred by the Holder other than
(i) by will or the laws of descent and distribution or (ii) pursuant to
beneficiary designation procedures approved by the Company. Except to the extent
permitted by the foregoing sentence prior to the Issuance Date, the Stock Units
and Restricted Stock Units may not be sold, transferred, assigned, pledged,
hypothecated, encumbered or otherwise disposed of (whether by operation of law
or otherwise) or be subject to execution, attachment or similar process. Upon
any attempt to so sell, transfer, assign, pledge, hypothecate or encumber, or
otherwise dispose of such Stock Units or Restricted Stock Units, the Award shall
immediately become null and void.
6.2. Withholding Taxes. (a) As a condition precedent to the delivery to the
-----------------
Holder of any shares of Stock subject to the Award, the Holder shall, upon
request by the Company, pay to the Company such amount of cash as the Company
may be required, under all applicable federal, state, local or other laws or
regulations, to withhold and pay over as income or other withholding taxes (the
"Required Tax Payments") with respect to the Award. If the Holder shall fail to
advance the Required Tax Payments after request by the Company, the Company may,
in its discretion, deduct any Required Tax Payments from any amount then or
thereafter payable by the Company or a Subsidiary to the Holder.
(b) The Holder may elect to satisfy the obligation to advance the Required Tax
Payments by any of the following means: (1) a cash payment to the Company
pursuant to
3
<PAGE>
Section 6.2(a), (2) delivery (either actual delivery or by
attestation procedures established by the Company) to the Company of previously
owned whole shares of Stock (which the Holder has good title, free and clear of
all liens and encumbrances) having a Fair Market Value, determined as of the
date the obligation to withhold or pay taxes first arises in connection with the
Award (the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the
Company to withhold from the shares of Stock otherwise to be delivered to the
Holder pursuant to the Award, a number of whole shares of Stock having a Fair
Market Value, determined as of the Tax Date, equal to the Required Tax Payments,
(4) a cash payment by a broker-dealer acceptable to the Company through whom the
Holder has sold the shares with respect to which the Required Tax Payments have
arisen, except as prohibited by Section 402 of the Sarbanes-Oxley Act of 2002 or
(5) any combination of (1), (2) and (3). The Committee shall have sole
discretion to disapprove of an election pursuant to any of clauses (2)-(5).
Shares of Stock to be delivered or withheld may not have a Fair Market Value in
excess of the minimum amount of the Required Tax Payments. Any fraction of a
share of Stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Holder. No
certificate representing a share of Stock shall be delivered until the Required
Tax Payments have been satisfied in full.
6.3 Adjustment. In the event of any stock split, stock dividend,
----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Award shall be
appropriately adjusted by the Committee. The decision of the Committee regarding
any such adjustment shall be final, binding and conclusive.
6.4 Compliance with Applicable Law. The Award is subject to the condition
--------------------------------
that if the listing, registration or qualification of the shares of Stock to be
issued under the Award upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the vesting
or delivery of shares hereunder, such shares of Stock shall not be delivered, in
whole or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained, free of any conditions not
acceptable to the Company. The Company agrees to use reasonable efforts to
effect or obtain any such listing, registration, qualification, consent or
approval.
6.5 Original Issue or Transfer Taxes. The Company shall pay all original
----------------------------------
issue or transfer taxes and all fees and expenses incident to such delivery,
except as otherwise provided in Section 6.2.
6.6 No Voting Rights. The Holder shall not have any voting rights unless
-----------------
and only to the extent shares of Stock are issued on the Issuance Date.
6.7 Award Confers No Rights to Continued Employment. In no event shall the
-----------------------------------------------
granting of the Award or its acceptance by the Holder give or be deemed to give
the Holder any right to continued employment by the Company or any affiliate of
the Company.
6.8 Decisions of Board or a Committee of the Board. The Board or the
--------------------------------------------------
Committee shall have the right to resolve all questions which may arise in
connection with the
4
<PAGE>
Award. Any interpretation, determination or other action
made or taken by the Board or the Committee regarding the Plan or this Agreement
shall be final, binding and conclusive.
6.9 Agreement Subject to the Plan. This Agreement is subject to the
--------------------------------
provisions of the Plan and shall be interpreted in accordance therewith. The
Holder hereby acknowledges receipt of a copy of the Plan.
7. Miscellaneous Provisions.
------------------------
7.1 Meaning of Certain Terms. (a) As used herein, the term
---------------------------
"vest" shall mean no longer subject to forfeiture.
(b) As used herein, "Disability" shall mean Holder's absence from Holder's
duties with the Company or its affiliated companies on a full-time basis for at
least 180 consecutive days as a result of Holder's incapacity due to physical or
mental illness.
(c) As used herein, employment by the Company shall include employment by a
corporation which is a "subsidiary corporation" of the Company, as such term is
defined in section 424 of the Code. References in this Agreement to sections of
the Code shall be deemed to refer to any successor section of the Code or any
successor internal revenue law.
7.2 Modification, Waiver and Invalidity. The parties may modify this
-------------------------------------
Agreement only by written instrument signed by each of the parties hereto.
Failure by either party to enforce a provision of this Agreement shall not
constitute a waiver of that or any provision of this Agreement. The invalidity
or unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement.
7.3 Successors. This Agreement shall be binding upon and inure to the
----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Holder, acquire any rights hereunder in
accordance with this Agreement or the Plan.
7.4 Notices. All notices, requests or other communications provided for in
-------
this Agreement shall be made, if to the Company, to the Corporate Secretary at
The ServiceMaster Company, 3250 Lacey Road, Suite 600, Downers Grove, Illinois
60515, and if to the Holder, to the address of the Holder contained in the
Company's records. All notices, requests or other communications provided for in
this Agreement shall be made in writing either (a) by personal delivery, (b) by
facsimile with confirmation of receipt, (c) by mailing in the United States
mails to the last known address of the party entitled thereto, (d) by express
courier service or (e) electronic mail delivery system. The notice, request or
other communication shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile transmission, or upon receipt by the party
entitled thereto if by United States mail, express courier service or return
receipt of electronic delivery system; provided, however, that if a notice,
request or other communication sent to the Company is not received during
regular business hours, it shall be deemed to be received on the next succeeding
business day of the Company.
7.5 Governing Law. This Agreement, the Award and all determinations made
-------------
and actions taken pursuant hereto and thereto, to the extent not otherwise
governed by the laws
5
<PAGE>
of the United States, shall be governed by the laws of the
State of Delaware and construed in accordance therewith without giving effect to
conflicts of laws principles.
7.6 Counterparts. This Agreement may be executed in two counterparts, each
------------
of which shall be deemed an original and both of which together shall constitute
one and the same instrument.
THE SERVICEMASTER COMPANY
By: /s/ Sandra L. Groman
----------------------------------
Name: Sandra L. Groman
Title: Corporate Secretary
Accepted this 18th day of December, 2004.
/s/ Jonathan P. Ward
---------------------
Jonathan P. Ward
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>9
<FILENAME>exh10-36.txt
<DESCRIPTION>LETTER AGREEMENT C.WILLIAM POLLARD
<TEXT>
EXHIBIT 10.36
January 1, 2004
Mr. C. William Pollard
1116 N. Stoddard Ave.
Wheaton, IL 60187
Dear Bill:
At your request and in connection with other considerations, we are
writing to you on behalf of The ServiceMaster Company and its Board of Directors
to set forth a restatement and amendment of your agreement dated March 21, 2002.
This Agreement reflects the matters approved by the Compensation and Leadership
Development Committee of ServiceMaster's Board of Directors on December 18, 2003
and supersedes your agreement dated March 21, 2002 in its entirety.
In consideration of the mutual promises and agreements contained in
this Agreement, ServiceMaster and you agree, as of January 1, 2004 (the
"Effective Date"), as follows:
1. Position and Services. (a) You shall be designated Chairman Emeritus
---------------------
of ServiceMaster, subject to your execution of this
Agreement.
(b) During the past 25 years, you have served as a senior officer, Chairman
of the Board and twice as Chief Executive Officer of ServiceMaster. As you have
now retired from these senior officer positions, you have agreed to provide
consulting services to ServiceMaster and its subsidiaries. Such services will be
related to operations, training and education, and shall be furnished as and
when the Board of Directors or the Chief Executive Officer or his designate may
reasonably request and subject to your reasonable availability giving due
consideration to your other responsibilities.
(c) It is understood and expected that in the normal course of rendering
such services, you will not receive information that would require you to assume
the obligations of an "insider". However, if you do receive such information,
you agree to abide by the ServiceMaster policy regarding "insiders", a copy of
which is attached hereto.
2. Payments and Benefits. In consideration of your past services to
-----------------------
ServiceMaster and your agreement to abide by the other
terms and conditions herein including but not limited to paragraphs 10, 11, 13,
14 and 15 of this Agreement, ServiceMaster shall pay you in equal semi-monthly
installments in accordance with the payroll practices of ServiceMaster,
commencing on the Effective Date and ending on the earlier of (1) the last day
of the calendar month during which your death occurs or (2) the date on which
you and ServiceMaster agree to terminate this Agreement, the semi-monthly amount
of $8,333.34 and shall further provide you and your wife Judy the benefits and
other payments for the times and periods herein described.
<PAGE>
3. Reimbursement of Expenses. ServiceMaster shall reimburse you for all
--------------------------
unreimbursed expenses properly incurred by you in the course of your provision
of consulting services under this Agreement.
4. Federal and State Deductions. ServiceMaster shall deduct from the
------------------------------
amounts payable by ServiceMaster pursuant to paragraphs 2, 9 and 16 the amount
of all required federal and state withholding deductions.
5. Insurance Benefits.
------------------
(a) Group Health, Dental, Life, Accidental Death and Dismemberment,
----------------------------------------------------------------------
Short-Term Disability and Long-Term Disability Insurance. On and after May 1,
- ----------------------------------------------------------
2002 and until the date of your death, ServiceMaster shall provide to you and
your dependents group health, dental, life, accidental death and dismemberment,
short-term disability and long-term disability insurance on the same terms as
such insurance is provided to active executive officers of ServiceMaster and
their dependents. For purposes of the foregoing sentence, your wife Judy shall
be deemed to be a dependent. If your wife Judy survives your death, until the
date of her death ServiceMaster shall provide to her the same insurance as
described in the first sentence of this paragraph 5(a).
(b) Compensation Plans. On and after May 1, 2002, you shall be eligible to
-------------------
participate in ServiceMaster's Employee Share Purchase Plan, Profit Sharing and
Retirement Plan and other ServiceMaster plans in accordance with the terms of
those plans.
6. Office Space and Secretary. On and after May 1, 2002 and until the
-----------------------------
earlier of (1) June 1, 2013 and (2) the date of your death, ServiceMaster shall
provide to you, for your exclusive use, office space of size and character, and
furnished in a manner, comparable to the office space provided to you
immediately prior to May 1, 2002. Such office space shall be located at a site
agreed upon by you and the Chairman and Chief Executive Officer of
ServiceMaster. ServiceMaster shall also make available to you, on a full-time
basis, at ServiceMaster's expense, the services of a secretary who is reasonably
acceptable to you. ServiceMaster shall pay, on a current basis, all rents and
other reasonable costs and expenses relating to the operation of such office and
all salary, benefits and other costs and expenses relating to such secretarial
service.
7. Other Benefits.
--------------
(a) Automobile. On or after May 1, 2002 and until the date of your death,
----------
ServiceMaster shall provide you with the use of an automobile in accordance with
ServiceMaster's Executive Company Vehicle Policy. ServiceMaster shall reimburse
you for your expenses relating to the operation and maintenance of such vehicle
in accordance with such Policy.
(b) Club Membership. On and after May 1, 2002 and until the date of your
----------------
death, ServiceMaster shall pay, or reimburse you for, the annual dues of one
club
2
<PAGE>
membership designated by you and approved by the Chairman and Chief
Executive Officer of ServiceMaster.
8. Stock Options. As of April 24, 2001, each option to purchase
--------------
ServiceMaster common stock held by you shall (1) to the extent not exercisable
on April 24, 2001, become fully exercisable at the exercise price set forth in
such option, and (2) expire at 5:00 p.m., Central time, on June 1, 2013. In the
event of your death prior to June 1, 2013, your executor, administrator or
similar person, or beneficiary pursuant to any beneficiary designation
procedures approved by ServiceMaster, shall have the right to exercise each such
option prior to the expiration of such option. In accordance with the foregoing,
ServiceMaster and you agree that, as of April 24, 2001, your options to purchase
ServiceMaster common stock are as follows:
<TABLE>
<CAPTION>
No. of Options
Grant Date Outstanding at 3/1/02 Exercise Price Expiration Date
---------- --------------------- -------------- ---------------
<S> <C> <C> <C>
10/03/96 168,750 10.7778 6/01/13
02/13/97 168,750 11.2222 6/01/13
02/16/98 112,500 18.2583 6/01/13
01/29/99 150,000 18.0750 6/01/13
12/10/99 300,000 11.5000 6/01/13
12/10/99 479,674 11.5000 6/01/13
05/04/00 3,605 13.8700 6/01/13
03/16/01 250,000 10.5200 6/01/13
</TABLE>
Your options to purchase ServiceMaster common stock shall be modified only to
the extent set forth in this paragraph 8.
9. Change in Control. (a) In the event a Change in Control (as defined in
------------------
the 2001 Directors Stock Plan) occurs while payments are being made pursuant to
paragraph 2, then ServiceMaster shall, within 30 days after the date of the
Change in Control, at ServiceMaster's expense, purchase from a reputable
insurance company satisfactory to you, a policy which guarantees, from and after
the date of the Change in Control, the full and continuing payment of all the
compensatory and other benefits set forth in this Agreement.
(b) If the cost of the income protection policy described in sub-paragraph
(a) exceeds the lump sum payment described in this sub-paragraph (b), then
ServiceMaster may elect to pay to you, within 30 days after the date of the
Change in Control: (i) a cash, lump sum amount that is the actuarial equivalent
of the aggregate amount payable pursuant to paragraph 2 had the Change in
Control not occurred; plus (ii) an additional cash, lump sum amount which is
equal to all federal and state income taxes which are attributable to such
clause (i) amount plus all federal and state income taxes which are attributable
to the payment made with respect to this clause (ii). For purposes of the clause
(i) payment, actuarial equivalency shall be determined using the 1983 Group
3
<PAGE>
Annuity Mortality Table and the annual rate of interest on 10-year U.S. Treasury
securities for the month preceding the month in which the Change in Control
occurs.
10. Non-Competition Covenant. (a) Subject to sub-paragraph (e), on and
-------------------------
after the Effective Date and so long as you are being paid pursuant to paragraph
2 or 9 (the "Non-Competition Period"), you shall not in any manner, directly or
indirectly (whether as owner, stockholder, director, officer, employee,
principal, agent, consultant, independent contractor, partner or otherwise), in
any geographic area in which ServiceMaster or any subsidiary of ServiceMaster is
then conducting business, own, manage, operate, control, participate in, perform
services for, or otherwise carry on, a business similar to or competitive with
the business conducted by ServiceMaster or any subsidiary of ServiceMaster;
provided, that this provision shall not prohibit you from having an ownership or
other interest, including as an officer or other employee, in a ServiceMaster
franchise.
(b) Subject to sub-paragraph (e), you further agree that during the
Non-Competition Period you shall not (i) in any manner, directly or indirectly,
induce or attempt to induce any employee of ServiceMaster or any subsidiary of
ServiceMaster to terminate or abandon his or her employment for any purpose
whatsoever, or (ii) in connection with any business to which paragraph 10(a)
applies, call on, service, solicit or otherwise do business with any current or
prospective customer of ServiceMaster or any subsidiary of ServiceMaster.
(c) Nothing in this paragraph 10 shall prohibit you from being (i) a
stockholder in a mutual fund or a diversified investment company or (ii) a
passive owner of not more than one percent (1%) of the outstanding stock of any
class of a corporation, any securities of which are publicly traded, so long as
you have no active participation in the business of such corporation. For
purposes of this sub-paragraph (c), FairWyn Investment Company LLC, an Illinois
limited liability company, shall be deemed to be a diversified investment
company.
(d) If, at any time of enforcement of this paragraph 10, a court or an
arbitrator holds that the restrictions stated herein are unreasonable under
circumstances then existing, the parties hereto agree that the maximum period,
scope or geographical area reasonable under such circumstances shall be
substituted for the stated period, scope or area and that the court or
arbitrator shall be allowed to revise the restrictions contained herein to cover
the maximum period, scope and area permitted by law.
(e) Anything in the foregoing sub-paragraphs (a) through (d)
notwithstanding, if a Change in Control (as defined in the 2001 Directors Stock
Plan) occurs, the Non-Competition Period shall terminate and all of the
provisions of the foregoing sub-paragraphs (a) through (d) shall lapse and
become of no further force or effect.
11. Confidentiality. You shall not, at any time, make use of or disclose,
---------------
directly or indirectly, any (i) trade secret or other confidential or secret
information of ServiceMaster or any subsidiary of ServiceMaster or (ii) other
technical, business,
4
<PAGE>
proprietary or financial information of ServiceMaster or
any subsidiary of ServiceMaster not available to the public generally or to the
competitors of ServiceMaster or any subsidiary of ServiceMaster ("Confidential
Information"), except to the extent that such Confidential Information (a)
becomes a matter of public record or is published in a newspaper, magazine or
other periodical available to the general public, other than as a result of any
act or omission of you or (b) is required to be disclosed by any law, regulation
or order of any court or regulatory commission, department or agency.
12. Covered Service. In accordance with Article Eleven of ServiceMaster's
---------------
Certificate of Incorporation (the "Charter"), the services provided and to be
provided by you under this Agreement, shall be deemed to be a "Covered Service"
within the meaning of subsection 11.1.1 of the Charter and, to the extent any
services are not covered by any of subsection 11.1.1(a), (b) or (c) of the
Charter, this paragraph and the signature of the Chief Executive Officer on this
Agreement shall constitute a designation in writing as required by Article
Eleven of the Charter.
13. Defense of Claims. You shall cooperate with ServiceMaster in the
------------------
defense of any claims that may be made against ServiceMaster, to the extent that
such claims may relate to services performed by you for ServiceMaster or its
subsidiaries. ServiceMaster shall reimburse you for all reasonable expenses in
connection therewith, including travel expenses.
14. Remedies. You acknowledge that ServiceMaster would be irreparably
--------
injured by a violation of paragraph 10 or paragraph 11 of this Agreement, and
you agree that ServiceMaster shall be entitled to an injunction restraining you
from any actual or threatened breach of paragraph 10 or paragraph 11 of this
Agreement or to any other appropriate equitable remedy without any bond or other
security being required. If you shall be the prevailing party in case of any
dispute or disagreement arising out of or connected with any provision of this
Agreement, you shall be entitled to recover your reasonable attorneys' and all
reasonable expenses incurred in connection with any related proceeding (whether
in court or occurring pursuant to arbitration) including, without limitation,
any and all charges which may be made for the cost of arbitration and the fees
of any arbitrators, together with interest at the statutory rate from the date
on which such obligation shall have arisen.
15. No Other Compensation. You agree that all compensation and other
----------------------
benefits payable by ServiceMaster under this Agreement shall be in lieu of any
and all compensation otherwise payable to you for service on and after the
Effective Date as Chairman Emeritus or other employee of ServiceMaster.
Notwithstanding the foregoing, this paragraph 15 shall not affect any amounts
payable to you or your estate on or after the Effective Date pursuant to the
exercise of any option or under the terms of ServiceMaster's 401(k) and Deferred
Compensation Plans, Long-Term Performance Award Plan or any similar plan
providing for the payment of deferred compensation.
16. Continuation Payments. Pursuant to a previous agreement and in addition
---------------------
to all other payments hereunder, ServiceMaster shall pay you $1,200.00 per month
5
<PAGE>
commencing in May 2002, for a period of 180 consecutive months. In the event of
your death, payments will continue to your designated beneficiary, Judy Pollard
or her estate, until the expiration of the 180 month period.
17. Disability. In the event that you are disabled or suffer from any
----------
mental or physical condition which impairs or prevents you from providing all or
some of the services contemplated hereunder, ServiceMaster shall nonetheless
continue to pay you all of the amounts and to provide you all of the benefits
which are set forth in this Agreement.
18. Arbitration. Except as provided in paragraph 14 of this Agreement, any
-----------
dispute or controversy between ServiceMaster and you, whether arising out of or
relating to this Agreement, the breach of this Agreement, or otherwise, shall be
settled by arbitration in Chicago, Illinois, administered by the American
Arbitration Association, with any such dispute or controversy arising under this
Agreement being so administered in accordance with its Commercial Rules then in
effect, and judgment on the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. The arbitrator shall have the authority
to award any remedy or relief that a court of competent jurisdiction could order
or grant, including, without limitation, the issuance of an injunction. However,
either party may, without inconsistency with this arbitration provision, apply
to any court having jurisdiction over such dispute or controversy and seek
interim provisional, injunctive or other equitable relief until the arbitration
award is rendered or the controversy is otherwise resolved. Except as necessary
in court proceedings to enforce this arbitration provision or an award rendered
hereunder, or to obtain interim relief, neither a party nor an arbitrator may
disclose the existence, content or results of any arbitration hereunder without
the prior written consent of ServiceMaster and you. ServiceMaster and you
acknowledge that this Agreement evidences a transaction involving interstate
commerce. Notwithstanding any choice of law provision included in this
Agreement, the United States Federal Arbitration Act shall govern the
interpretation and enforcement of this arbitration provision.
19. Successors; Binding Agreement. This Agreement shall inure to the
-------------------------------
benefit of and be enforceable by ServiceMaster and its successors and assigns
and by you and by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. This
Agreement shall not be terminated by any merger or consolidation of
ServiceMaster whereby ServiceMaster is or is not the surviving or resulting
corporation or as a result of any transfer of all or substantially all of the
assets of ServiceMaster. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall be binding upon the
surviving or resulting corporation or the person or entity to which such assets
are transferred.
20. Notices. All notices and other communications required or permitted
-------
under this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or five days after deposit in the United States mail,
postage prepaid, addressed (1) if to you, to C. William Pollard, 1116 N.
Stoddard Ave., Wheaton, IL 60187, and if to ServiceMaster, to The ServiceMaster
Company, 3250 Lacey Road, Suite 600, Downers
6
<PAGE>
Grove, IL 60515, attention General
Counsel, or (2) to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
21. Governing Law; Validity. The interpretation, construction and
-------------------------
performance of this Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Illinois without regard to the
principle of conflicts of laws. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any of the other provisions of this Agreement, which other provisions shall
remain in full force and effect.
22. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
23. Modification or Waiver. No provision of this Agreement may be modified
----------------------
or waived unless such modification or waiver is agreed to in writing and signed
by you and by the Chairman and Chief Executive Officer, President and Chief
Operating Officer or any Executive Vice President of ServiceMaster. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. Failure by you or
ServiceMaster to insist upon strict compliance with any provision of this
Agreement or to assert any right which you or ServiceMaster may have hereunder
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
24. Entire Agreement. Except as otherwise specified herein, this Agreement
----------------
and your stock option agreements referred to in paragraph 8 constitute the
entire agreement and understanding between the parties with respect to the
subject matter hereof and supersede and preempt any prior understandings,
agreements or representations by or between the parties, written or oral, which
may have related in any manner to the subject matter hereof.
25. Nonalienation. Benefits payable under this Agreement shall not be
-------------
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution or levy of any kind, either
voluntary or involuntary, prior to actually being received by you, your estate
or a beneficiary, as applicable, and any such attempt to dispose of any right to
benefits payable hereunder shall be void.
26. Termination. This Agreement may not be terminated except pursuant to a
-----------
writing signed by ServiceMaster and you.
7
<PAGE>
If you are in agreement with this letter, please sign each of the two
copies and return one copy to my attention.
Very truly yours,
THE SERVICEMASTER COMPANY
By: /s/ David K. Wessner
--------------------
David K. Wessner
Chairman of the Compensation and Leadership
Development Committee of the Board of Directors
By: /s/ Jonathan P. Ward
--------------------
Jonathan P. Ward
Chairman and Chief Executive Officer
CONFIRMED AND AGREED TO:
By: /s/ C. William Pollard
----------------------
C. William Pollard
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<FILENAME>exh10-37.txt
<DESCRIPTION>STOCK OPTION AGREEMENT C. WILLIAM POLLARD
<TEXT>
EXHIBIT 10.37
THE SERVICEMASTER COMPANY
STOCK OPTION AGREEMENT
March 16, 2001
The Company hereby grants to the Optionee as of the Grant
Date, pursuant to the provisions of the Plan, the Option to purchase the number
of Option Shares specified in the Term Sheet at the Exercise Price per share
upon and subject to the terms and conditions set forth below and in the Term
Sheet. References to employment shall also mean an agency or independent
contractor relationship and references to employment by the Company shall also
mean employment by a Subsidiary. Capitalized terms not defined herein shall have
the meanings specified in the Term Sheet or the Plan.
1. Option Subject to Acceptance of Agreement. The Option shall be null and
-----------------------------------------
void unless the Optionee shall accept this Agreement by executing one copy of
the related Term Sheet and returning an original execution copy to the Company.
2. Time and Manner of Exercise of Option.
-------------------------------------
2.1. Maximum Term of Option. In no event may the Option be exercised, in
----------------------
whole or in part, after the Expiration Date.
2.2. Exercise of Option. (a) Except as otherwise provided by Sections
-------------------
2.2(b) hereof and by Section 11 of the Plan, the Option shall become exercisable
in accordance with the Exercise Schedule set forth in the Term Sheet.
(b) If the Optionee's employment with the Company terminates by reason of
Disability or death, the Option shall be immediately exercisable with respect to
all of the Option Shares on the effective date of the Optionee's termination of
employment or date of death and may thereafter be exercised by the Optionee or
the Optionee's Legal Representative or Permitted Transferees, as the case may
be, until and including the earliest to occur of (i) the date which is two years
after the effective date of the Optionee's termination of employment or date of
death and (ii) the Expiration Date.
(c) If the Optionee's employment with the Company terminates by reason of
retirement on or after age 63 or after a minimum of fifteen years of employment
(fifteen years need not be consecutive) with the Company ("Retirement"), the
Option shall continue in accordance with its terms and, to the extent the Option
shall be or become exercisable with respect to the Option Shares, may thereafter
be exercised by the Optionee or the Optionee's Legal Representative until the
Expiration Date.
(d) If the Optionee's employment with the Company terminates for any reason
other than Disability, death or Retirement, the Option shall be exercisable only
to the extent it is
<PAGE>
exercisable on the effective date of the Optionee's
termination of employment and may thereafter be exercised by the Optionee or the
Optionee's Legal Representative until and including the earliest to occur of (i)
the date which is six months after the effective date of the Optionee's
termination of employment and (ii) the Expiration Date; provided that if the
Optionee's employment is terminated for Gross Misconduct, the Option shall
terminate automatically on the effective date of the Optionee's termination of
employment. Gross Misconduct means the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by the Optionee of confidential information or trade secrets of the Company or
any Subsidiary, or any other intentional misconduct by the Optionee adversely
affecting the business or affairs of the Company or any Subsidiary in a material
manner. The foregoing definition shall not be deemed to be inclusive of all the
acts or omissions which the Company or any Subsidiary may consider as grounds
for the dismissal or discharge of the Optionee or any other individual in the
employment of the Company or any Subsidiary.
(e) If the Optionee dies during the post-employment exercise period
pursuant to Section 2.2(b) following termination of employment by reason of
Disability, the Option shall continue in accordance with its terms and, to the
extent the Option has not been exercised as of the date of death, the Option may
thereafter be exercised by the Optionee's Legal Representative or Permitted
Transferees, as the case may be, until the earlier to occur of (i) one year
after the date of death and (ii) the Expiration Date.
(f) If the Optionee dies following termination of employment by reason of
Retirement and prior to the Expiration Date, and to the extent the Option has
not been exercised as of the date of death, the Option shall be immediately
exercisable with respect to all of the Option Shares and may thereafter be
exercised by the Optionee's Legal Representative or Permitted Transferees, as
the case may be, until the earliest to occur of (i) two years after the date of
death and (ii) the Expiration Date.
(g) If the Optionee dies during post-employment exercise period determined
pursuant to Section 2.2(d) following termination of employment for any reason
other than Disability, Retirement or Gross Misconduct, and to the extent the
Option has not been exercised as of the date of death, the Option may thereafter
be exercised by the Optionee's Legal Representative or Permitted Transferees, as
the case may be, until the earliest to occur of (i) three months after the date
of death and (ii) the Expiration Date.
2.3. Method of Exercise. Subject to the limitations set forth in this
-------------------
Agreement, the Option may be exercised by the Optionee (1) by giving written
notice to the Company specifying the number of whole shares of Stock to be
purchased and accompanied by payment therefor in full (or arrangement made for
such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery
(either actual delivery or by attestation procedures established by the Company)
of previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery of such shares or which the Optionee
purchased on the open market and in each case for which the Optionee has good
title, free and clear of all liens and encumbrances) having an aggregate Fair
Market Value, determined as of the date of exercise, equal to the aggregate
purchase price payable pursuant to the Option by reason of such exercise, (iii)
in cash by a broker-dealer acceptable to the Company to whom the Optionee has
submitted
2
<PAGE>
an irrevocable notice of exercise or (iv) a combination of (i) and
(ii), and (2) by executing such documents as the Company may reasonably request.
The Company shall have sole discretion to disapprove of an election pursuant to
any of clauses (ii) - (iv). Any fraction of a share of Stock which would be
required to pay such purchase price shall be rounded down and the Optionee will
be required to pay the fractional share portion to the next whole share. No
certificate representing a share of Stock shall be delivered until the full
purchase price therefor has been paid.
2.4 Termination of Option and Forfeiture of Option Gain. (a)
--------------------------------------------------------------
Notwithstanding the Term Sheet or any provision of this Agreement, if at any
time prior to the date that is one year after the date of exercise of all or any
portion of the Option, the Optionee:
(1) directly or indirectly (whether as owner, stockholder,
director, officer, employee, principal, agent, consultant, independent
contractor, partner or otherwise), in North America or any other
geographic area in which the Company is then conducting business, owns,
manages, operates, controls, participates in, performs services for, or
otherwise carries on, a business similar to or competitive with the
business conducted by the Company or any Subsidiary; or
(2) directly or indirectly attempts to induce any employee of
the Company to terminate or abandon his or her employment for any
purpose whatsoever or any attempt directly or indirectly to solicit the
trade or business of any current or prospective customer, supplier or
partner of the Company; or
(3) directly or indirectly engages in any activity which is
contrary, inimical or harmful to the interests of the Company,
including but not limited to (i) violations of Company policies (ii)
disclosure or misuse of any confidential information or trade secrets
of the Company or a Subsidiary (iii) participation in any activity not
approved by the Board or Chairman which could reasonably be foreseen as
contributing to or resulting in a Change in Control of the Company and
(iv) conduct related to employment for which either criminal or civil
penalties may be sought;
then the Option shall terminate automatically on the date the Optionee engages
in such activity and the Optionee shall pay the Company, within five business
days of receipt by the Optionee of a written demand therefor, an amount in cash
determined by multiplying the number of shares of Stock purchased pursuant to
each exercise of the Option within the one-year period described above (without
reduction for any shares of Stock delivered by the Optionee or withheld by the
Company pursuant to Section 2.3 or Section 3.2) by the difference between (i)
the Fair Market Value of a share of Stock on the date of such exercise and (ii)
the Exercise Price per share of Stock.
(b) The Optionee may be released from the Optionee's
obligations under Section 2.4(a) only if and to the extent the Committee
determines in its sole discretion that such a release is in the best interests
of the Company.
(c) The Optionee agrees that by executing this Agreement the
Optionee authorizes the Company and its Subsidiaries to deduct any amount or
amounts owed by the
3
<PAGE>
Optionee pursuant to Section 2.4(a) from any amounts payable
by the Company or any Subsidiary to the Optionee, including, without limitation,
any amount payable to the Optionee as salary, wages, vacation pay or bonus. This
right of setoff shall not be an exclusive remedy and the Company's or a
Subsidiary's election not to exercise this right of setoff with respect to any
amount payable to the Optionee shall not constitute a waiver of this right of
setoff with respect to any other amount payable to the Optionee or any other
remedy.
3. Additional Terms and Conditions of Option.
-----------------------------------------
3.1. Nontransferability of Option. The Option may not be transferred by the
----------------------------
Optionee other than (i) by will or the laws of descent and distribution or (ii)
pursuant to beneficiary designation procedures approved by the Company. Except
to the extent permitted by the foregoing sentence, during the Optionee's
lifetime the Option is exercisable only by the Optionee or the Optionee's Legal
Representative. Except to the extent permitted by the foregoing, the Option may
not be sold, transferred, assigned, pledged, hypothecated, encumbered or
otherwise disposed of (whether by operation of law or otherwise) or be subject
to execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the
Option, the Option and all rights hereunder shall immediately become null and
void.
3.2. Withholding Taxes. (a) As a condition precedent to the delivery of
------------------
Stock upon exercise of the Option, the Optionee shall, upon request by the
Company, pay to the Company in addition to the purchase price of the shares,
such amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay over as
income or other withholding taxes (the "Required Tax Payments") with respect to
such exercise of the Option. If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.
(b) The Optionee may elect to satisfy his or her obligation to advance the
Required Tax Payments by any of the following means: (1) a cash payment to the
Company pursuant to Section 3.2(a), (2) delivery (either actual delivery or by
attestation procedures established by the Company) to the Company of previously
owned whole shares of Stock (which the Optionee has held for at least six months
prior to the delivery of such shares or which the Optionee purchased on the open
market and in each case for which the Optionee has good title, free and clear of
all liens and encumbrances) having an aggregate Fair Market Value, determined as
of the date the obligation to withhold or pay taxes first arises in connection
with the Option (the "Tax Date"), equal to the Required Tax Payments, (3)
authorizing the Company to withhold whole shares of Stock which would otherwise
be delivered to the Optionee upon exercise of the Option having an aggregate
Fair Market Value, determined as of the Tax Date, equal to the Required Tax
Payments, (4) a cash payment by a broker-dealer acceptable to the Company to
whom the Optionee has submitted an irrevocable notice of exercise or (5) any
combination of (1), (2) and (3). The Company shall have sole discretion to
disapprove of an election pursuant to any of clauses (2)-(5). No certificate
representing a share of Stock shall be delivered until the Required Tax Payments
have been satisfied in full.
4
<PAGE>
3.3. Adjustment. In the event of any change in the capitalization of the
----------
Company (such as a stock split) or a corporate transaction (such as any merger,
consolidation, separation, including a spin-off, or other distribution of stock
or property of the Company), any reorganization (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code) or any partial or complete liquidation of the Company, the number and
class of securities subject to the Option and the purchase price per security
shall be appropriately adjusted by the Committee without an increase in the
aggregate purchase price. The decision of the Committee regarding any such
adjustment shall be final, binding and conclusive.
3.4. Compliance with Applicable Law. The Option is subject to the condition
------------------------------
that if the listing, registration or qualification of the shares subject to the
Option upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the purchase or delivery of
shares hereunder, the Option may not be exercised, in whole or in part, unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company agrees to use reasonable efforts to effect or obtain any such listing,
registration, qualification, consent or approval.
3.5. Delivery of Certificates. Upon the exercise of the Option, in whole or
------------------------
in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.2.
3.6. Option Confers No Rights as Shareholder. The Optionee shall not be
-----------------------------------------
entitled to any privileges of ownership with respect to shares of Stock subject
to the Option unless and until purchased and delivered upon the exercise of the
Option, in whole or in part, and the Optionee becomes a shareholder of record
with respect to such delivered shares; and the Optionee shall not be considered
a shareholder of the Company with respect to any such shares not so purchased
and delivered.
3.7. Option Confers No Rights to Continued Employment. In no event shall
-------------------------------------------------
the granting of the Option or its acceptance by the Optionee give or be deemed
to give the Optionee any right to continued employment by or service with the
Company or any affiliate of the Company.
3.8. Decisions of Board or Committee. The Board or the Committee shall have
-------------------------------
the right to resolve all questions which may arise in connection with the Option
or its exercise. Any interpretation, determination or other action made or taken
by the Board or the Committee regarding the Plan or this Agreement shall be
final, binding and conclusive.
3.9. Company to Reserve Shares. The Company shall at all times prior to the
-------------------------
expiration or termination of the Option reserve and keep available, either in
its treasury or out of its authorized but unissued shares of Stock, the full
number of shares subject to the Option from time to time.
5
<PAGE>
3.10. Agreement Subject to the Plan. This Agreement is subject to the
-------------------------------
provisions of the Plan, and shall be interpreted in accordance therewith. The
Optionee hereby acknowledges receipt of a copy of the Plan.
4. Miscellaneous Provisions.
------------------------
4.1. Designation as Nonqualified Stock Option. The Option is hereby
--------------------------------------------
designated as not constituting an "incentive stock option" within meaning of
section 422 of the Code; this Agreement shall be interpreted and treated
consistently with such designation.
4.2. Meaning of Certain Terms. (a) As used herein, employment by the
--------------------------
Company shall include employment by a corporation which is a "subsidiary
corporation" of the Company, as such term is defined in section 424 of the Code.
References in this Agreement to sections of the Code shall be deemed to refer to
any successor section of the Code or any successor internal revenue law.
(b) As used herein, the term "Legal Representative" shall include an
executor, administrator, legal representative, guardian or similar person and
the term "Permitted Transferee" shall include any transferee (i) pursuant to a
transfer permitted under Section 6.7 of the Plan and Section 3.1 hereof or (ii)
designated pursuant to beneficiary designation procedures approved by the
Company.
4.3. Successors. This Agreement shall be binding upon and inure to the
----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Optionee, acquire any rights hereunder in
accordance with this Agreement or the Plan.
4.4. Notices. All notices, requests or other communications provided for in
-------
this Agreement shall be made, if to the Company, to the Corporate Secretary at
The ServiceMaster Company, One ServiceMaster Way, Downers Grove, IL 60515, and
if to the Optionee, to the address of the Optionee contained in the Company's
records. All notices, requests or other communications provided for in this
Agreement shall be made in writing either (a) by personal delivery, (b) by
facsimile with confirmation of receipt, (c) by mailing in the United States
mails to the last known address of the party entitled thereto, (d) by express
courier service or (e) electronic mail delivery system. The notice, request or
other communication shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile transmission or upon receipt by the party
entitled thereto if by United States mail, express courier service or return
receipt of electronic mail delivery system; provided, however, that if a notice,
request or other communication sent to the Company is not received during
regular business hours, it shall be deemed to be received on the next succeeding
business day of the Company.
4.5. Governing Law. This Agreement, the Option and all determinations made
-------------
and actions taken pursuant hereto and thereto, to the extent not governed by the
laws of the United States, shall be governed by the laws of the State of
Delaware and construed in accordance therewith without giving effect to
principles of conflicts of law.
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>11
<FILENAME>exh10-38.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT ERNEST J. MROZEK
<TEXT>
EXHIBIT 10.38
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of January 1,
2004 (the "Effective Date") by and between ERNEST J. MROZEK ("Executive") and
THE SERVICEMASTER COMPANY, a Delaware corporation ("ServiceMaster").
WHEREAS, Executive currently serves as President and Chief Operating
Officer of ServiceMaster;
WHEREAS, ServiceMaster desires that Executive serve as President and
Chief Financial Officer ("CFO") of ServiceMaster;
WHEREAS, ServiceMaster desires to continue to employ Executive and
Executive desires to continue to be employed by ServiceMaster; and
WHEREAS, ServiceMaster and Executive desire to set forth the terms and
conditions upon which Executive shall serve as President and CFO of
ServiceMaster.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations contained herein, and intending to be legally bound, the parties,
subject to the terms and conditions set forth herein, agree as follows:
Defined Terms. Any capitalized terms which are not defined within this
-------------
Agreement are defined in Exhibit A hereto attached.
1. Term. ServiceMaster shall employ Executive as President and CFO, and
----
Executive agrees to serve as President and CFO for the period commencing on the
Effective Date and continuing through and including the earlier of the effective
date of Executive's termination of employment ("Date of Termination"), the date
of Executive's death, and December 31, 2006 (the "Term").
2. Duties. During the Term, and subject to the powers, authorities and
------
responsibilities vested in the Board of Directors of ServiceMaster (the
"Board"), committees of the Board and in the Chief Executive Officer of
ServiceMaster ("CEO"), Executive shall have the authorities and responsibilities
consistent with his experience and training and position as President and CFO,
including the authority and responsibility for the operation of business units
mutually agreed upon by Executive and the CEO, for the management of the
Memphis, Tennessee campus, for the management of the financial accounting,
internal audit, investor relations, tax, treasury and safety functions, for
oversight of the branch manager training function and technician compensation
programs, and for the negotiation, review and approval of proposed acquisitions,
investments and divestitures. The Executive shall also have such other
authorities and responsibilities as the Board, a committee of the Board or CEO
shall determine from time to time, which duties shall be at least substantially
equal in status and character to the authorities and responsibilities of
Executive on the Effective Date.
3. Obligations of ServiceMaster During the Term. Subject to Section 4,
-----------------------------------------------
ServiceMaster shall provide the following to Executive during the Term:
<PAGE>
(a) Salary. ServiceMaster shall pay Executive an annual base
------
salary ("Base Salary") in an amount not less than $550,000, payable in
accordance with the payroll practices of ServiceMaster.
(b) Annual Bonus. Executive shall be eligible to participate
------------
in ServiceMaster's annual bonus plan in respect of each fiscal year of
ServiceMaster on the same terms and conditions, including performance
criteria, as other executive officers of ServiceMaster (other than the
president of a business unit); provided, that Executive's target annual
bonus shall be not less than 100% of Base Salary.
(c) LTPA. Executive shall be eligible to participate in
----
ServiceMaster's Long-Term Performance Award Plan or any successor plan
("LTPA") in respect of each fiscal year of ServiceMaster on the same
terms and conditions as other executive officers of ServiceMaster;
provided, that Executive's target payout for any fiscal year shall be
not less than $595,000 .
(d) Equity-Based Compensation. Executive shall be eligible to
-------------------------
be granted stock options, restricted stock and/or other equity-based
compensation awards on the same terms and conditions as other executive
officers of ServiceMaster; provided, that Executive's target annual
value attributed by the Compensation and Leadership Development
Committee of the Board ("CLDC") to such awards shall be at least
substantially consistent with Executive's 2003 target value of
$659,000.
(e) Compensation Committee Approval. Notwithstanding Sections
-------------------------------
4(a)-(d), but subject to the definition of Good Reason as set forth in
Exhibit A, Executive understands and agrees that the CLDC has the
authority and responsibility to approve Executive's Base Salary, target
annual bonus, target annual LTPA payout and target annual value
attributed by the CLDC to equity-based compensation.
(f). Benefits. Executive shall be entitled to those employee
--------
benefits and perquisites which ServiceMaster from time to time
generally makes available to its executive officers ("Benefits")
subject to the terms and conditions of such benefit plans or programs.
The Benefits shall include, without limitation, medical insurance,
dental insurance, life insurance, accidental death and dismemberment
insurance, vision insurance, disability insurance, flexible spending
account, four weeks of paid annual vacation and such other benefits,
including company car and dues payable for club memberships, as the
Board, CLDC or CEO may determine from time to time. In addition to the
foregoing Benefits and subject to approval by the CLDC, Executive may
use the company plane for personal use in accordance with the Policy
Regarding Use of Company Aircraft.
(g) Deferred Compensation Plan. Executive may elect to defer
--------------------------
Base Salary and earned annual bonus and/or LTPA payouts in accordance
with ServiceMaster's deferred compensation plan.
2
<PAGE>
(h) Reimbursement of Expenses. Executive shall be reimbursed
-------------------------
for all proper and reasonable expenses incurred by Executive in the
performance of his duties hereunder in accordance with the policies of
ServiceMaster. In addition, during the Term, so long as Executive is
employed by ServiceMaster and Executive maintains a residence in each
of the Chicago metropolitan area and the Memphis metropolitan area,
ServiceMaster shall reimburse Executive, for each night the performance
of his duties hereunder results in his staying overnight at his
residence in the Chicago metropolitan area. The amount of the
reimbursement shall be $150 per night and shall not include any amounts
incurred by Executive at restaurants, which amounts shall be reimbursed
to Executive in accordance with the first sentence of this Section
3(h). In addition, ServiceMaster shall reimburse Executive, in
accordance with its Relocation Policy for Tier IV employees, for the
costs of moving his residence while Executive is employed by
ServiceMaster from the Memphis metropolitan area to the Chicago
metropolitan area; provided, that any such costs paid by ServiceMaster
shall be repaid to ServiceMaster by Executive if Executive's employment
with ServiceMaster is terminated on or prior to December 31, 2006 and
ServiceMaster would be obligated to make payments to Executive under
Section 4(a).
4. Termination.
-----------
(a) In the event that Executive's employment hereunder is terminated
(i) during the period beginning on and including the Effective Date and ending
on and including June 30, 2005 by ServiceMaster without Cause or by Executive
for Good Reason or (ii) during the period beginning on and including July 1,
2005 and ending on and including December 31, 2006 by ServiceMaster without
Cause or by Executive for any reason (including for Good Reason or by reason of
retirement), but excluding by reason of death or Disability, then ServiceMaster
shall pay to Executive within 60 days after the Date of Termination, as
compensation for services rendered to ServiceMaster and its affiliated
companies, a lump sum cash amount equal to the sum of subsections (1)-(4) below
and, in addition, the amount determined under subsection (5) below, in each case
subject to any applicable payroll or other taxes required to be withheld:
(1) Executive's full annual Base Salary through the Date of
Termination, to the extent not previously paid (but after giving
effect to any amounts that would be deferred pursuant to the
ServiceMaster deferred compensation plan); plus
(2) two (2) times Executive's highest annual Base Salary in
effect during the Term; plus
(3) two (2) times Executive's highest target annual bonus during
the Term; plus
(4) reimbursement of Executive's expenses pursuant to Section
3(h); plus
3
<PAGE>
(5) any restriction period applicable to shares of ServiceMaster
restricted stock held by you as of the Date of Termination will lapse,
and all such shares shall vest, as of the close of business on the
Date of Termination;
provided, that Executive understands and agrees that any amount payable
and any restricted stock that vests pursuant to Section 4(a)(2), (3) or
(5) by reason of a termination by Executive of Executive's employment
shall be conditioned upon Executive giving notice in accordance with
Section 8 to ServiceMaster not less than 45 days prior to the Date of
Termination.
(b) In the event that Executive's employment hereunder is
terminated (i) during the period beginning on and including the
Effective Date and ending on and including June 30, 2005 by
ServiceMaster for Cause or by Executive without Good Reason or by
reason of retirement, death or Disability or (ii) during the period
beginning on and including July 1, 2005 and ending on and including
December 31, 2006 by ServiceMaster for Cause or by reason of
Executive's death or Disability, then ServiceMaster shall pay to
Executive (or Executive's executors, legal representatives or
administrators in the event of Executive's death) within 60 days after
the Date of Termination or date of death, as compensation for services
rendered to ServiceMaster and its affiliated companies, a lump sum cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to the sum of:
(1) Executive's full annual Base Salary through the Date of
Termination or date of death, to the extent not previously paid (but
after giving effect to any amounts that would be deferred pursuant to
the ServiceMaster deferred compensation plan); plus
(2) reimbursement of Executive's expenses pursuant to Section
3(h).
(c) Exclusive Severance. Subject to Section 6, any amount paid
-------------------
pursuant to Section 4(a) or (b) shall be paid in lieu of any other
amount of severance relating to salary or bonus continuation to be
received by Executive upon termination of employment of Executive under
any severance plan, policy or arrangement of ServiceMaster or its
affiliated companies.
(d) Stock Options. Each option to purchase shares of
-------------
ServiceMaster's common stock held by Executive on the Date of
Termination or date of death shall continue in accordance with its
terms. For purposes of each such option, a termination of Executive's
employment for any reason shall be treated as a "retirement" after a
minimum of 15 years of employment and, to the extent each such option
shall be or become exercisable on or after the Date of Termination or
date of death, may thereafter be exercised by you until the applicable
expiration date of the option.
4
<PAGE>
(e) Restricted Stock. Each restricted stock award held by
----------------
Executive shall be subject to the terms and conditions of the
applicable restricted stock award agreement and corresponding
ServiceMaster plan, including, without limitation, the restriction
periods, vesting schedules and termination provisions.
(f) Continuation of Benefits. In the event that Executive's
------------------------
employment hereunder is terminated (i) during the period beginning on
and including the Effective Date and ending on and including June 30,
2005 by ServiceMaster without Cause or by Executive for Good Reason or
(ii) during the period beginning on and including July 1, 2005 and
ending on and including December 31, 2006 by ServiceMaster without
Cause or by Executive for any reason (including for Good Reason or by
reason of retirement), but excluding by reason of death or Disability,
then for a period of two years commencing on the Date of Termination,
ServiceMaster and its subsidiaries shall continue to provide all
Benefits, as then generally made available to executive officers, with
respect to Executive and Executive's dependents. After the expiration
of such two-year period, Executive shall be entitled to continue
Executive's medical coverage under Federal law (COBRA).
(g) PSRP and ESPP. Executive's participation, if any, in the
-------------
ServiceMaster Profit Sharing and Retirement Plan ("PSRP") and Employee
Stock Purchase Plan ("ESPP") shall end as the Date of Termination or
date of death, if applicable.
(h) Deferred Compensation Plan. Executive's participation, if
--------------------------
any, in the ServiceMaster deferred compensation plan shall end as the
Date of Termination or date of death, if applicable. Any compensation
previously deferred by Executive (together with any interest and
earnings thereon) under the deferred compensation plan or any successor
plan shall be paid or distributed in accordance with the terms of the
plan and Executive's elections under the plan.
5. Covenants.
---------
(a) Non-Competition, Non-Solicitation and Confidentiality. From
------------------------------------------------------
and after the Effective Date and through and including December 31,
2007 (or, if earlier, the date that is one year after the Date of
Termination), Executive shall not do any of the following, directly or
indirectly, without the prior written consent of ServiceMaster:
(1) directly or indirectly (whether as owner, stockholder,
director, officer, employee, principal, agent, consultant,
independent contractor, partner or otherwise), in North
America or any other geographic area in which ServiceMaster is
then conducting business, own, manage, operate, control,
participate in, perform services for, or otherwise carry on, a
business similar to or competitive with the business conducted
by ServiceMaster or any subsidiary of ServiceMaster; or
5
<PAGE>
(2) directly or indirectly attempt to induce any employee of
ServiceMaster to terminate or abandon his or her employment
for any purpose whatsoever or any attempt directly or
indirectly to solicit the trade or business of any current or
prospective customer, supplier or partner of ServiceMaster; or
(3) directly or indirectly engage in any activity which is
contrary, inimical or harmful to the interests of
ServiceMaster, including but not limited to (i) violations of
ServiceMaster policies, (ii) disclosure or misuse of any
confidential information or trade secrets of ServiceMaster or
a subsidiary of ServiceMaster, (iii) participation in any
activity not approved by the Board which could reasonably be
foreseen as contributing to or resulting in a Change in
Control and (iv) conduct related to employment for which
either criminal or civil penalties may be sought.
Executive acknowledges and agrees that each stock
option agreement and restricted stock award held by Executive
contains covenants of Executive relating to competition
against ServiceMaster and its subsidiaries, confidentiality
and non-solicitation of employees and customers and similar
obligations of Executive. Executive agrees that such covenants
are separate from this Agreement, shall continue in accordance
with their respective terms and shall survive the termination
of this Agreement.
(b) Litigation and Regulatory Cooperation. During and after
-------------------------------------
Executive's employment, Executive shall cooperate fully with
ServiceMaster in the defense or prosecution of any claims or actions
now in existence or which may be brought in the future against or on
behalf of ServiceMaster that relate to events or occurrences that
transpired while Executive was employed by ServiceMaster. Executive's
full cooperation in connection with such claims or actions shall
include, but not be limited to, being available to meet with counsel to
prepare for discovery or trial and to act as a witness on behalf of
ServiceMaster at mutually convenient times. During and after
Executive's employment, Executive also shall cooperate fully with
ServiceMaster in connection with any investigation or review of any
federal, state or local regulatory authority as any such investigation
or review relates to events or occurrences that transpired while
Executive was employed by ServiceMaster. ServiceMaster shall reimburse
Executive for any reasonable out-of-pocket expenses incurred in
connection with Executive's performance of obligations pursuant to this
Section 5(b).
6. Effect of Change in Control Agreement.
-------------------------------------
(a) Executive and ServiceMaster are parties to a Change in
Control Severance Agreement dated as of October 31, 2001 (the "CIC
Agreement"). Pursuant to Section 8 of the CIC Agreement, ServiceMaster
shall have the right prior to a Change in Control, in its sole
discretion, pursuant to action by the Board, a committee thereof or the
CEO, to approve the termination of the CIC Agreement;
6
<PAGE>
provided, that no
such action shall be taken by the Board, a committee thereof or the CEO
during any period of time when the Board has knowledge that any Person
(as defined in the CIC Agreement) has taken steps reasonably calculated
to effect a Change in Control until, in the opinion of the Board, such
Person has abandoned or terminated its efforts to effect a Change in
Control; and provided, further, that in no event shall the CIC
Agreement be terminated after a Change in Control.
(b) If, during the Term, (1) a Change in Control of
ServiceMaster occurs and (2) the CIC Agreement is in effect on the date
of the Change in Control, this Agreement shall be terminated and
superseded by the CIC Agreement, as such agreement may be amended,
modified or superseded from time to time.
7. Successors and Assigns. This Agreement shall inure to the benefit of and
----------------------
be enforceable by ServiceMaster and its successors and assigns and by Executive
and Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. This Agreement shall not
be terminated by any merger or consolidation of ServiceMaster whereby
ServiceMaster is or is not the surviving or resulting corporation or as a result
of any transfer of all or substantially all of the assets of ServiceMaster. In
the event of any such merger, consolidation or transfer of assets, the
provisions of this Agreement shall be binding upon the surviving or resulting
corporation or the person or entity to which such assets are transferred.
8. Notice. All notices and other communications required or permitted under
------
this Agreement shall be in writing and shall be deemed to have been duly given
when delivered or five days after deposit in the United States mail, postage
prepaid, addressed (a) if to Executive, to Ernest J. Mrozek, 9 South Bodin,
Hinsdale, Illinois 60521, and if to ServiceMaster, to The ServiceMaster Company,
3250 Lacey Road, Downers Grove, Illinois 60515, attention General Counsel or
Corporate Secretary, or (b) to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
9. Entire Agreement; Amendments. Except as otherwise specified herein, this
----------------------------
Agreement and Exhibit A constitute the entire agreement and understanding
between the parties with respect to the subject matter hereof and supersede and
preempt any prior understandings, agreements or representations by or between
the parties, written or oral, which may have related in any manner to the
subject matter hereof.
10. Modification or Waiver. No provision of this Agreement may be modified
----------------------
or waived unless such modification or waiver is agreed to in writing and signed
by Executive and by the Chairman, Chief Executive Officer, any Executive Vice
President, Treasurer or General Counsel of ServiceMaster or any successor under
this Agreement. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. Failure by Executive or ServiceMaster to insist upon strict
compliance with any provision of this Agreement or to assert any right which
7
<PAGE>
Executive or ServiceMaster may have hereunder shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.
11. Governing Law; Validity. The interpretation, construction and
-------------------------
performance of this Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Illinois without regard to the
principle of conflicts of laws. The invalidity or enforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any of the other provisions of this Agreement, which other provisions shall
remain in full force and effect.
12. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed the day and year first written above.
THE SERVICEMASTER COMPANY
By: /s/ Jonathan P. Ward
---------------------
Name: Jonathan P. Ward
Title: Chairman and Chief Executive Officer
/s/ Ernest J. Mrozek
--------------------
ERNEST J. MROZEK
8
<PAGE>
Exhibit A
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
(a) "Cause" means:
-----
(1) a material breach by Executive of his duties and
responsibilities (other than as a result of incapacity due to physical
or mental illness) which is demonstrably willful and deliberate on
Executive's part, which is committed in bad faith or without reasonable
belief that such breach is in the best interests of ServiceMaster and
which is not remedied within 30 days after receipt of written notice
from ServiceMaster specifying such breach; or
(2) the commission by Executive of a felony or
misdemeanor involving any act of fraud, embezzlement or dishonesty or
any other intentional misconduct by Executive that substantially and
adversely affects the business affairs or reputation of ServiceMaster
or an affiliated company.
(b) "Change in Control" shall have the meaning set forth in
-----------------
the CIC Agreement; provided, that in the event such definition shall be
modified or revised in the CIC Agreement, then the definition of Change
in Control for purposes of this Agreement shall be so modified or
revised.
(c) "Disability" means Executive's absence from Executive's
----------
duties with ServiceMaster or its affiliated companies on a full-time
basis for at least 180 consecutive days as a result of Executive's
incapacity due to physical or mental illness.
(d) "Good Reason" means, without Executive's written consent,
-----------
the occurrence of any of the following events:
(1) any of (i) the reduction in any material respect
in Executive's position(s), authorities or responsibilities with
ServiceMaster, (ii) an adverse change in Executive's reporting
relationships, or (iii) any failure to re-elect Executive to any
executive officer position with ServiceMaster held by the Executive;
(2) a reduction in Executive's Base Salary, target
annual bonus, target annual LTPA payout or target annual value
attributed by the CLDC to equity-based compensation, each as in effect
on the Effective Date or as the same may be increased from time to time
thereafter; provided, that it shall not constitute Good Reason if any
reduction is approved by the CLDC and the percentage reduction is equal
to or less than the corresponding percentage reduction in compensation
or target compensation of the CEO; or
(3) the failure of ServiceMaster to (i) provide
Executive and Executive's dependents Benefits substantially comparable
to the plans, practices, programs and policies of ServiceMaster and its
subsidiaries in effect for Executive on the Effective Date, (ii)
provide fringe benefits substantially comparable to the
<PAGE>
plans, practices, programs and policies of ServiceMaster and its
subsidiaries in effect for Executive on the Effective Date, (iii)
provide an office, together with secretarial and other assistance,
substantially comparable to that provided to Executive by
ServiceMaster on the Effective Date, or (iv) provide Executive with
four weeks annual paid vacation.
For purposes of this Agreement, an isolated,
insubstantial and inadvertent action taken in good faith and which is
remedied by ServiceMaster after receipt of notice thereof given by
Executive shall not constitute Good Reason.
A-2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>12
<FILENAME>areport.txt
<DESCRIPTION>SERVICEMASTER'S 2003 ANNUAL REPORT
<TEXT>
<TABLE>
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
AS OF AND FOR THE YEARS ENDED DECEMBER 31 2003 2002 CHANGE
-------------------------------------------------------------------------------- ------------- ------------- -------------
OPERATING RESULTS
<S> <C> <C> <C>
Operating revenue $3,568,586 $3,500,721 2%
Operating income (loss) (1) (166,243) 335,393
Income (loss) from continuing operations (1,2) (221,975) 157,303
Loss from discontinued operations (3) (2,712) (309)
---------------------------
Net income (loss) ($224,687) $156,994
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations (1,2) $(0.75) $0.51
Loss from discontinued operations (3) (0.01) -
---------------------------
Diluted earnings (loss) per share $(0.76) $0.51
Cash dividends per share $0.42 $0.41 2%
-------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total assets $2,956,426 $3,414,938
Total debt 819,271 835,475
Shareholders' equity 816,517 1,218,700
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS
Cash from operating activities $283,538 $374,191 (24%)
-------------------------------------------------------------------------------------------------------------------------
SHARE PRICE RANGE
(TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL SVM)
High price for the year $12.10 $15.50
Low price for the year 8.95 8.89
Closing price as of December 31, 11.65 11.10
</TABLE>
(1) The Company's goodwill and intangible assets that are not amortized are
subject to at least an annual assessment for impairment by applying a
fair-value based test. During the third quarter of 2003, the Company
recorded a non-cash impairment charge associated with goodwill and
intangible assets at its American Residential Services, American Mechanical
Services and TruGreen LandCare business units of $481 million pre-tax ($383
million after-tax). The impact on diluted earnings per share of this charge
was $1.30.
(2) In 2003, the Company adopted Statement of Financial Accounting Standards
(SFAS) 145, which eliminated the requirement to report all material gains
and losses from the extinguishment of debt as extraordinary items. In 2002,
the Company recorded an extraordinary loss of $.03 per diluted share ($15
million pre-tax, $9 million after-tax) from the early extinguishment of
debt. As a result of the Company's adoption of SFAS 145 in 2003, this loss
has been reclassified into continuing operations interest expense, thereby
reducing the previously reported 2002 income from continuing operations and
related diluted earnings per share from continuing operations by the same
amount.
(3) In the third quarter of 2003, the Company sold the assets and related
operational obligations of the utility line clearing operations of TruGreen
LandCare. The results of the utility line clearing operations have been
reclassified as "Discontinued operations" for all periods presented and are
not included in continuing operations. Earnings per share from continuing
operations in 2002 were reduced $.01 and correspondingly earnings per share
from discontinued operations were increased by $.01 to reflect the
reclassification of the divested utility line clearing business as
discontinued operations.
1
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED REVIEW
ServiceMaster ("the Company") faced challenging weather and economic conditions
and 10 year lows in consumer confidence in the first half of 2003. Late snow and
cooler temperatures early in the year in many regions of the country delayed
TruGreen's lawn care production season and impeded the development of the
termite swarm, negatively impacting the volume of termite services in Terminix.
The Company responded to these challenges by implementing an aggressive cost
reduction program which resulted in the elimination of over 600 jobs, enacting a
wage and hiring freeze, reducing significantly incentive compensation for senior
management, and enforcing tighter management of field labor. These actions as
well as more normal weather conditions in the fourth quarter contributed to
improved results in the second half of the year.
Going into 2004, the Company is focused on four key areas across the enterprise:
1. BRAND DEVELOPMENT AND DELIVERY - Continued development and delivery of
clear and distinctive brand propositions derived from listening to the
customer, which will involve changing, aligning and refining the Company's
offerings to be more valuable to its customers. This includes enhancing the
visible results of lawn care services at TruGreen through the use of more
effective weed control; providing customers with greater choice in the type
and timing of services provided by Terminix; and providing guaranteed
on-time technician arrival within a two-hour window at American Residential
Services (ARS).
2. ENHANCING SERVICE CAPABILITIES - Use of technology and Six Sigma to improve
the customer service capabilities and efficiency of the organization,
especially relating to the branches.
3. COMPLIANCE AND SAFETY - Continued focus on compliance and safety
initiatives which includes adding professional safety and loss-prevention
managers in the field; increasing employee communication and training;
improving the Company's measurement and tracking systems; and tying a
portion of incentive pay of operating leadership to improvements in safety.
4. TRAINING - Development and training of employees, including the launch of a
company-wide branch manager training school.
As the Company looks toward 2004 it will maintain a strong focus on top-line
sales growth, increased pricing discipline, continued improvements in customer
retention and employee satisfaction and improving margins in TruGreen LandCare,
ARS and American Mechanical Services (AMS). The Company expects its profit
growth in 2004 to be partially offset by higher safety and insurance-related
costs and a return to a more normal level of incentive compensation. These
factors, combined with the current economic and employment outlook, lead the
Company to expect revenue growth to be in the mid-single digits in 2004 with
earnings per share growing slightly faster. Earnings per share growth is
typically faster than revenue growth due to the Company's ability to leverage
its cost base on the incremental volume. The Company expects to experience
continued pressure from insurance costs, which grew by approximately $.03 per
share in 2003 and are expected to increase approximately another $.03 per share
in 2004. In addition, there was a reduced level of incentive compensation earned
during the year for senior, and to a lesser degree, middle management of the
Company in 2003. The impact of potentially funding the total amount that could
be earned in 2004 based on improved operating results could result in
approximately $.05 - $.06 per share of incremental expense. This impact however,
should be offset by the effect of the cost reduction initiatives implemented in
late 2003.
2003 COMPARED WITH 2002
Revenue for 2003 was $3.6 billion, two percent above 2002. The Company reported
a net loss from continuing operations in 2003 of ($222) million and a loss from
discontinued operations of ($3) million. The net loss of ($225) million in 2003
compared with net income of $157 million in 2002. Diluted earnings per share was
a ($.76) loss in 2003 and $.51 in 2002.
Diluted earnings per share from continuing operations was a loss of ($.75) in
2003 compared with $.51 in 2002. The diluted earnings per share for 2003
includes a non-cash goodwill and intangible assets impairment charge of $1.30
per share ($481 million pre-tax, $383 million after-tax). Operating income for
2003 was a loss of ($166) million, compared with income of $335 million in 2002.
The 2003 results include the $481 million non-cash impairment charge. The net
change in operating income reflects strong growth at American Home Shield and
ServiceMaster Clean and increased profits in TruGreen's lawn care operations and
Terminix, offset by the impact of the impairment charge, reduced profitability
in TruGreen's landscaping operations as well as at AMS. There was also increased
spending at the headquarters level.
The diluted earnings per share from continuing operations amount of $.51 in 2002
includes $.03 of expense relating to the early extinguishment of debt. This was
previously reported as an extraordinary item in 2002 and not part of income from
continuing operations. In 2003, the Company adopted a new accounting standard
which required the 2002 expense to be reclassified into continuing operations as
interest expense.
In the third quarter of 2003, the Company recorded a non-cash impairment charge
associated with the goodwill and intangible assets at its ARS, AMS and TruGreen
LandCare business units of $481 million pre-tax, which is $383 million after-tax
or $1.30 per share. In accordance with SFAS 142, "Goodwill and Other Intangible
Assets", goodwill and intangible assets that are not amortized are subject to
assessment for impairment by applying
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a fair-value based test on an annual basis or more frequently if circumstances
indicate a potential impairment. The Company's annual assessment date is October
1.
Based on events and underlying trends in its HVAC, plumbing and commercial
landscape business, the Company determined that these businesses were unlikely
to generate the necessary cash flows to support the recorded value of goodwill
and intangible assets. There were several factors leading up to the resulting
impairment charge. Throughout the first half of the year, management believed
that the significant declines in operating results in these businesses were due
to temporary conditions and that the operations, with an anticipated good summer
season, would show ongoing improvement which would support the amount of
goodwill and intangible assets on the balance sheet. The Company had discussed
such events and trends in its press releases and periodic filings with the
Securities and Exchange Commission. In the third quarter of 2003, the results
did not improve. In addition, the Company identified certain branch closures at
ARS and announced the sale of its utility line clearing operations at TruGreen
LandCare. The lack of a good summer season, combined with declining
profitability in the base businesses, led management to conclude that the
businesses were unlikely to meet the previous projections which had supported
the carrying value. As a result, the Company recorded a non-cash impairment
charge to reduce the carrying value of the assets to $56 million, their
estimated fair value.
During the fourth quarter of 2003, the Company recorded a reduction in revenue
and operating income as a result of a correction in its historical method of
recognizing renewal revenues from certain Terminix and American Home Shield
customers who have prepaid. The effects of the adjustment were not material to
prior years. This adjustment reduced operating and pre-tax income by $12
million, or $.02 per share in the fourth quarter of 2003. The Company also
recorded a favorable adjustment as a result of positive trending in certain
termite damage claim costs. This resulted in a pre-tax reduction in expense of
$7 million in the fourth quarter and $13 million, or $.03 per share, for the
full year. Combined, these items reduced revenues for the fourth quarter by $14
million and reduced operating and pre-tax income in the fourth quarter by
approximately $5 million. In addition, the Company incurred severance and shut
down costs primarily associated with branch closures and had lower incentive
compensation expense than the prior year; the net effect of these latter two
other items was immaterial.
Cost of services rendered and products sold increased one percent compared to
the prior year and decreased as a percentage of revenue to 68.1 percent in 2003
from 68.5 percent in 2002. This decrease reflects a change in the mix of
business as TruGreen ChemLawn, Terminix, and American Home Shield increased in
size in relationship to the overall business of the Company. These businesses
generally operate at higher gross margin levels than the rest of the business,
but also incur somewhat higher selling and administrative expenses as a
percentage of revenue. Selling and administrative expenses increased seven
percent and increased as a percentage of revenue to 22.9 percent from 21.7
percent in 2002. The increase in selling and administrative expenses primarily
reflects the change in business mix described above, as well as increased
expenditures for sales and marketing and higher technology and compliance costs
at the headquarters level.
Net interest expense decreased $35 million from 2002, reflecting the payment in
2002 of a $15 million premium to repurchase public bonds, lower interest expense
from reduced debt balances, as well as higher investment income from securities
gains in the American Home Shield investment portfolio.
Comparability of the effective tax rate is impacted by the impairment charge
recorded in the third quarter of 2003 and the use of prior year net operating
losses in 2002. The effective tax rate of continuing operations reflects a one
percent benefit in 2003 and a 35 percent provision in 2002. The impairment
charge recorded in 2003 included a portion of goodwill that was not deductible
for tax purposes, resulting in a tax benefit of $98 million, or approximately 20
percent of the pre-tax impairment charge of $481 million. Excluding the
impairment charge the tax rate was 37 percent. The 2002 rate included a one-time
benefit from utilizing the prior year net operating losses of the ServiceMaster
Home Service Center operations, which resulted in a reduction in the tax
provision. The Company anticipates the effective tax rate of continuing
operations to increase slightly in 2004 to a more normalized rate of
approximately 39 percent.
SEGMENT REVIEW (2003 VS. 2002)
KEY PERFORMANCE INDICATORS
As of December 31,
2003 2002
----------- -----------
TRUGREEN -
Growth in Full Program Contracts 4% 2%
Customer Retention Rate 59.5% 59.3%
TERMINIX -
Growth in Pest Control Customers 2% 2%
Pest Control Customer Retention Rate 77.1% 75.8%
Growth in Termite Customers -2% -%
Termite Customer Retention Rate 88.1% 89.0%
AMERICAN HOME SHIELD -
Growth in Warranty Contracts 5% 15%
Customer Retention Rate 55.1% 55.0% *
* Restated to conform with the 2003 calculation
TRUGREEN SEGMENT
The TruGreen segment includes lawn care services performed under the TruGreen
ChemLawn brand name and landscape maintenance services provided under the
TruGreen LandCare brand name. During the third quarter of 2003, the Company sold
the assets and related operational obligations of the utility line clearing
operations of TruGreen LandCare for approximately $20 million in cash. The
impact of this sale was not material to the Company's consolidated financial
statements for 2003. The results of the sold utility line clearing operations
have been reclassified as discontinued operations and are not included in
continuing operations.
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The TruGreen segment reported revenues of $1.3 billion in 2003, five percent
above the prior year. The segment reported an operating loss of ($34) million,
compared with operating income of $165 million in 2002. During the third quarter
of 2003, the Company recorded a non-cash impairment charge of $189 million
pre-tax, relating to goodwill and intangible assets of its TruGreen LandCare
operations. For a further discussion of the impairment charge see the "Goodwill
and Intangible Assets" section in the Notes to Consolidated Financial
Statements. The decrease in segment operating income primarily reflects the
impact of the impairment charge as well as a $15 million decline in profits in
the landscaping operations, partially offset by a $5 million increase in
operating income in the lawn care operations.
Revenue in the lawn care operations increased six percent over 2002 reflecting a
four percent increase in the number of customers, which has been supported by
tuck-in acquisitions, and growth in revenue from commercial accounts and
ancillary services (e.g., add-on services such as lawn aeration and grub
control). The Company has responded to increased state and federal restrictions
on telemarketing by broadening its marketing approach, with increased
expenditures on direct mail and other advertising. A 10 percent decline in sales
through the traditional telemarketing channel was offset by a doubling of sales
through other channels, most notably direct mail. Sales through
non-telemarketing channels comprised 20 percent of new sales in 2003. Continued
development of these other channels will be a critical focus in 2004 as the
Company continues to work through the effects of the national Do-Not-Call list.
Telemarketing is a cost effective sales channel relative to other channels.
Therefore, as a result of this shift, the Company has experienced an increase in
its marketing costs.
As the Company continues to reduce its dependency on telemarketing, there will
be a change in the timing of when new customers are obtained. Typically,
telemarketing is a preseason activity that is particularly heavy in January and
February. Therefore, the shift to more non-telemarketing sales will move the
addition of new customers from preseason activity to sales from direct mail and
other channels which are "in season". As a result, the Company expects to
experience a slight decline in lawn care customer counts during the first
quarter of 2004, followed by increases in subsequent quarters. Quality of
service initiatives have resulted in the customer retention rate improving 20
basis points to 59.5 percent compared to 59.3 percent in 2002. This improvement
follows a 160 basis point increase in retention achieved in 2002. Customer
feedback indicates that cancellations due to quality issues have decreased
relative to the prior year, whereas those due to economic considerations have
increased. The Company believes this trend is a result of its increased focus on
customer service and problem resolution.
Operating income in the lawn care operations increased three percent. Favorable
weather in the fourth quarter partially offset the impact of poor weather in the
first quarter of the year. Margins declined slightly, reflecting the higher
marketing costs discussed above as well as increased insurance costs.
Revenue in the landscape maintenance business increased two percent compared to
2002, consisting of modest growth in base contract maintenance volume and an
increase in first quarter snow removal revenue, offset by a reduced level of
enhancement sales (e.g., add-on services such as seasonal flower plantings).
Enhancement sales activity was depressed due to the weak economy and increased
pricing pressure from competitors. Operating income in the landscaping
operations declined in 2003, reflecting the impact of the impairment charge as
well as a decreased level of higher margin enhancement sales, increased
insurance and labor costs, and approximately $1.5 million of costs incurred to
consolidate branch locations. In 2004, the Company expects improvement in
operating income from the landscaping operations resulting from adding
management depth and industry experience, improving pricing and cost
disciplines, consolidating sub-scale branches, and expanding its safety
professionals and programs.
Capital employed in the TruGreen segment decreased 16 percent, primarily
reflecting the impact of the impairment charge, partially offset by tuck-in
acquisitions. Capital employed is a non-U.S. GAAP measure that is defined as the
segment's total assets less liabilities, exclusive of debt balances. The Company
believes this information is useful to investors in helping them compute return
on capital measures and therefore better understand the performance of the
Company's business segments.
TERMINIX SEGMENT
The Terminix segment, which includes termite and pest control services, reported
a two percent increase in revenue to $945 million from $924 million in 2002 and
operating income of $131 million compared to $127 million in the prior year, a
3% increase. The growth in revenue reflects higher revenue in both termite
renewals and pest control. Cooler temperatures earlier in the year that impacted
many regions of the country significantly impeded the development of the termite
swarm. This resulted in fewer sales of new termite contracts and also had a
dampening effect on renewals. Operating performance improved in the second half
of the year as termite revenue stabilized, customer retention rates improved and
strong cost controls were implemented. Renewal revenues increased, resulting
from favorable mix and pricing. Pest control volume increased, driven by
improved customer retention and stronger commercial sales.
Operating income margins improved slightly compared to the prior year,
reflecting lower than expected damage claims in the acquired Sears termite
customer base, partially offset by incremental costs associated with the unit's
new branch operating system. The roll-out of this system to all of the Terminix
branches is expected to be completed in the spring of 2004. In the fourth
quarter of 2003, Terminix corrected its method of recognizing renewal revenue
from certain customers who have prepaid. A cumulative adjustment was recorded
reducing fourth quarter revenue by $9 million and operating income by $7
million. The Company also continued to experience positive trending in damage
claim costs associated with its acquired Sears termite customer base, resulting
in a $7 million reduction in expense in the fourth quarter and $13 million for
the full year.
The Company will be entering 2004 with an enhanced segmented termite offering
for consumers. With the improved
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efficacy of liquid termite treatments, the Company is providing consumers with
the choice of receiving termite services through baiting stations or liquid
treatments. The Company believes that providing consumers a choice in services
will increase the number of sales leads closed and result in improved price
realization. The Company estimates the mix of its new termite sales to move from
80 percent bait and 20 percent liquid at the end of 2003 to 35 percent bait and
65 percent liquid in 2004. The Company's analyses indicate that lifetime values
of its liquid and bait termite customers are comparable; however, the earnings
cycles are different with liquid customers having less first year profitability
and more profitability in subsequent years. The Company anticipates that
increased termite volume from a more normal swarm in 2004 and improved pricing
will help offset the first year effect of this change in mix.
Capital employed in the Terminix segment was comparable to the level in 2002.
AMERICAN HOME SHIELD SEGMENT
The American Home Shield segment, which provides home warranties to consumers
that cover HVAC, plumbing and other systems and appliances, reported a six
percent increase in revenue to $450 million, from $424 million in 2002, and
operating income growth of 21 percent, to $58 million compared to $48 million in
2002. Contract sales increased eight percent, driven by strong growth in renewal
activity, reflecting both a larger base of renewable customers and improved
customer loyalty, as well as the impact of price increases. Retention rates
improved 10 basis points despite increased cancellations from mortgage
refinancings. Sales from the direct-to-consumer channel increased modestly, with
the timing of sales coming later in the year as third-party direct mail
solicitations were delayed. Real estate sales increased slightly for the year as
a whole, but were adversely impacted later in the year by a decline in home
listings, particularly in California and Texas, which are two of the Company's
largest warranty usage states.
In the fourth quarter of 2003, AHS corrected its method of recognizing revenue
from customers who have prepaid. A $5 million cumulative adjustment was
recorded, reducing fourth quarter revenue and operating income by that amount.
Operating margins improved 40 basis points due to a reduction in the current
year claims incidence rate and favorable trending of prior year claims. The
claims incidence rate is expected to increase slightly in 2004. AHS has been
successful in implementing programs to reduce low cost claims, control the
prices paid to its contractor network, and utilize technology to improve both
productivity and customer convenience.
Capital employed increased 34 percent reflecting a higher level of investments
due to the growth in the business and improved market performance of the
investments. The calculation of capital employed for the American Home Shield
segment includes approximately $221 million and $172 million of cash, short-term
and long-term securities at December 31, 2003 and 2002, respectively. The
interest and realized gains/losses on these investments are reported as
non-operating income/expense.
ARS/AMS SEGMENT
The ARS/AMS segment primarily provides HVAC and plumbing installation and repair
services under the ARS Service Express, Rescue Rooter, and American Mechanical
Services (for large commercial accounts) brand names. The segment reported
revenue of $674 million, a decrease of six percent compared to $719 million in
2002. The segment reported an operating loss of ($282) million compared with
operating income of $17 million in 2002. During the third quarter of 2003, the
Company recorded a non-cash impairment charge of $292 million pre-tax relating
to goodwill and intangible assets of its ARS/AMS segment. For a further
discussion on the impairment charge see the "Goodwill and Intangible Assets"
section in the Notes to the Consolidated Financial Statements.
Within ARS Service Express, revenue declined five percent, primarily reflecting
an industry-wide reduction in plumbing service calls and the effects of
discontinued branches. HVAC replacement sales from ongoing operations were up
slightly, despite less favorable temperatures and the weak economy. The Company
is encouraged by its progress with specific initiatives to increase replacement
sales through third-party retail channels, and to increase residential sewer
line repairs. In addition, ARS achieved a 98 percent success rate on its new
two-hour arrival guarantee in its HVAC service line, which was rolled out in
October in certain markets. As part of its efforts to offset the revenue
shortfalls it has been experiencing and to improve profitability, ARS has
strengthened its management team and industry experience at all levels,
emphasized higher margin sales, tightened control over indirect costs and
overheads, and sold or closed 12 under-performing branches or service lines.
Those operations had $35 million in revenues in 2002 and $20 million prior to
their closure in 2003. Operating profits at ARS Service Express, declined due to
the third-quarter impairment charge as well as a decrease of $.7 million from
operations. These results, however, include incremental shutdown costs and
operating losses prior to disposition of approximately $1.8 million.
AMS' revenues decreased nine percent, reflecting reduced levels of project work
due to depressed conditions in the commercial construction industry. The project
backlog increased substantially by year-end, but bid pricing remains very
competitive with longer lead-times for projects to start.
Capital employed in the ARS/AMS segment declined reflecting the impact of the
impairment charge.
OTHER OPERATIONS SEGMENT
The Other Operations segment includes the Company's ServiceMaster Clean and
Merry Maids operations as well as its headquarters functions. Revenue in this
segment increased two percent to $152 million in 2003 compared with $149 million
in the prior year. The combined ServiceMaster Clean and Merry Maids franchise
operations reported revenue growth of eight percent, driven primarily by
continued excellent results in disaster restoration services. The impact of the
franchise operations revenue growth was partially offset by $6 million of
licensing fees recorded in the third quarter of 2002 related to the Company's
former Terminix United Kingdom operations.
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The segment reported an operating loss of ($40) million in 2003 compared with a
loss of ($23) million in 2002. Continued strong growth in operating income of
ServiceMaster Clean was more than offset by higher costs at the headquarters
level related to insurance, marketing and compliance, and the effect of the $6
million of non-recurring licensing fee income earned in 2002, as well as the
compensation expense related to a deferred compensation trust. Accounting
standards require that appreciation on investments in a deferred compensation
trust be reflected as compensation expense in computing operating income, with a
corresponding amount of investment income included in non-operating
income/expense.
Total initial and recurring franchise fees (excluding trade name license
agreements) represented 2.6 percent of consolidated revenue in both 2003 and
2002, respectively, and related franchise operating expenses were 1.6 percent
and 1.7 percent of consolidated operating expenses in 2003 and 2002. Total
franchise fee income (excluding the aforementioned trade name license
agreements) comprised 13 percent and 11 percent of consolidated operating income
before impairment charges in 2003 and 2002, respectively. The portion of total
franchise fee income related to initial fees received from the sales of
franchises was not material to the Company's consolidated financial statements
for all periods.
DISCONTINUED OPERATIONS
During the third quarter of 2003, the Company sold the assets and related
operational obligations of Trees, Inc., the utility line clearing operations of
TruGreen LandCare, for approximately $20 million in cash. The impact of the sale
was not material to the Company's Consolidated Financial Statements for 2003.
Earnings per share from continuing operations were reduced $.01 in 2002 and
2001, respectively, to reflect the reclassification of the divested utility line
clearing business as discontinued operations.
During the third quarter of 2002, the Company sold its Terminix operations in
the United Kingdom. The impact of this sale was not material to the consolidated
financial statements.
In 2001 the Company sold its Management Services business to ARAMARK Corporation
for approximately $800 million. The all-cash transaction closed on November 30,
2001 and the Company recorded an after-tax gain of $404 million from this sale.
(A division of Management Services was not sold as part of this transaction and
the Company recorded a $15 million loss upon disposition of this unit). In
addition, the Company exited several non-strategic and under-performing
businesses including TruGreen LandCare Construction, Certified Systems Inc.
(CSI), and certain Terminix Europe operations.
The components of discontinued operations are as follows:
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------
Management
Services income * $ - $ - $33,172
Income (loss) from
other discontinued
operations (2,107) 4,531 (67,782)
Gain on sale of
Management Services,
net of losses
from disposition of
other entities (605) (4,840) 323,213
- ------------------------------------------------------------------
Discontinued
operations $(2,712) $(309) $288,603
==================================================================
* This business was sold on November 30, 2001, consequently the 2001 results
reflect eleven months of operations.
RESULTS OF OPERATIONS - 2002 COMPARED WITH 2001
CONSOLIDATED REVIEW
Revenues for 2002 were $3.5 billion, one percent above 2001. The Company
reported income from continuing operations in 2002 of $157 million and a loss
from discontinued operations of less than $1 million. Net income was $157
million in 2002 and $116 million in 2001 and diluted earnings per share were
$.51 in 2002 and $.39 in 2001.
Diluted earnings per share from continuing operations was $.51 in 2002 compared
with a loss of ($.58) in 2001. There were three significant items in 2001 that
impact the comparability of the reported amounts with the 2002 figures. First,
diluted earnings per share from continuing operations for 2001 includes a charge
of $.94 per share ($345 million pre-tax) primarily related to goodwill and asset
impairments and other items. Second, as discussed further in the Notes to the
Consolidated Financial Statements, SFAS No. 142, "Goodwill earnings and Other
Intangible Assets", requires that beginning in 2002, goodwill and trade names no
longer be amortized. SFAS 142 does not permit the restatement of 2001 financial
information to reflect the impact of this Statement. The reduced amortization
expense for 2001 is $60 million pre-tax ($.14 per diluted share equivalent).
Third, in the fourth quarter of 2001, the Company received approximately $740
million of after-tax proceeds, net of expected cash payments relating to the
sale and exit of discontinued businesses.
In the third quarter of 2003, the Company sold its utility line clearing
operations of TruGreen LandCare. As a result, the 2002 and 2001 diluted earnings
per share from continuing operations were reduced $.01, respectively, to reflect
the divested business as discontinued operations. In 2003, the Company adopted a
new accounting standard which required extraordinary gains/losses from the early
extinguishment of debt to be reclassified into interest expense. The reported
earnings (loss) per share from continuing operations of $.51 in 2002 and ($.58)
in 2001 includes $.03 and $.01, respectively, of expense related to the early
extinguishment of debt which were previously reported as extraordinary items and
not part of income from continuing operations.
In 2002 operating income was $335 million compared to an operating loss of $30
million in 2001. The 2001 figure includes
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a $345 million charge primarily related to goodwill and asset impairments and
other items. Additionally, the reduced amortization expense under SFAS 142 was
$60 million. Operating income margins declined reflecting the above items and
reduced volume in the heating, ventilation and air conditioning (HVAC) and
plumbing businesses of ARS and AMS, increased workers compensation and health
insurance costs, as well as increased expenditures related to enterprise-wide
initiatives, partially offset by strong growth at American Home Shield.
Cost of services rendered and products sold were unchanged compared to the prior
year and decreased as a percentage of revenue to 68.5 percent in 2002 from 69.1
percent in 2001. This decrease reflects a change in the mix of business as
TruGreen ChemLawn, Terminix, and American Home Shield increased in size in
relationship to the overall business of the Company. Selling and administrative
expenses increased 11 percent and increased as a percentage of revenue to 21.7
percent from 19.8 percent in 2001. This increase in selling and administrative
expenses reflects increased expenditures for marketing leadership and sales
initiatives, as well as enterprise-wide expenditures in procurement, technology
and initiatives to measure and improve customer and employee satisfaction.
Interest expense decreased from the prior year, primarily reflecting reduced
debt levels resulting from the pay down of debt with the proceeds received from
the sales of the Management Services and certain European pest control
businesses, strong cash flows from operating activities, partially offset by $6
million more in premium payments to repurchase public bonds in 2002. Interest
income declined as a result of net investment losses recorded on the American
Home Shield investment portfolio in 2002 compared with net investment gains from
this portfolio as well as venture capital gains realized in 2001. Minority
interest and other expense increased in 2002 because 2001 included minority
interest income related to the ServiceMaster Home Service Center initiative. In
the first quarter of 2001 and until May 2001, the operating losses of
ServiceMaster Home Service Center had been offset through minority interest
income because of investments in the venture made by Kleiner Perkins Caufield &
Byers (Kleiner Perkins). In December 2001, the Company acquired the minority
interest in the ServiceMaster Home Service Center held by Kleiner Perkins.
The tax provision in 2002 reflects a lower effective tax rate based on benefits
received through the consolidation for tax purposes of the ServiceMaster Home
Service Center. As a result of the Company's acquisition of the minority
interest, it was able to reorganize the subsidiary in 2002 and utilize prior
year net operating losses of this subsidiary operation.
SEGMENT REVIEW (2002 VS. 2001)
2001 RESULTS HAVE BEEN PRESENTED ON A PROFORMA BASIS AS IF SFAS 142 HAD BEEN IN
EFFECT FOR 2001 THEREBY EXCLUDING THE AMORTIZATION EXPENSE AFFECTED BY THE NEW
ACCOUNTING STANDARD. (SEE THE "BUSINESS SEGMENT REPORTING" NOTE IN THE NOTES TO
THE FINANCIAL STATEMENTS). MANAGEMENT'S DISCUSSION AND ANALYSIS FOCUSES ON THE
2002 REPORTED AND 2001 PROFORMA AMOUNTS.
TRUGREEN SEGMENT
The TruGreen segment reported revenues of $1.3 billion, consistent with 2001.
Operating income was $165 million, a decrease of five percent compared to $173
million (proforma) in 2001.
Revenue in the lawn care business increased one percent over 2001, which
included a two percent increase in customer contracts over 2001. This increase
compares with a four percent decline in customer contracts in 2001. The Company
is realizing the benefit of improved customer retention as well as the impact
from new marketing strategies. Quality and other satisfaction initiatives have
resulted in the customer retention rate improving 160 basis points to 59.3
percent in 2002 compared with 57.7 percent in 2001. Margins in the lawn care
operations declined slightly, reflecting increased expenditures in marketing and
customer retention initiatives, partially offset by margin improvements
resulting from revenue growth and the quality of service and Six Sigma
initiatives.
Revenue in the landscape maintenance business declined three percent as a softer
economic environment contributed to a decline in the core maintenance business
as well as a decline in enhancement services. Despite the decline in the
maintenance business, the contract base is more profitable reflecting lower job
costs, improved pricing, and a stronger customer base. Operating income margins
in the landscaping business declined primarily as a result of higher workers
compensation claims and increased expenditures for field operations training.
Management continued to focus on labor efficiency and margin improvement through
Six Sigma projects.
Capital employed decreased four percent, primarily reflecting improved working
capital management resulting from increased customer prepayments and elimination
of excess equipment.
TERMINIX SEGMENT
The Terminix segment reported a nine percent increase in revenue to $924 million
from $845 million in 2001 and operating income growth of four percent to $127
million from $123 million (proforma) in 2001. Revenue growth was driven by the
acquisition in October 2001 of Sears Termite & Pest Control as well as internal
growth. As expected by the Company, there has been a substantial decrease in
profitable Sears pest control customers in certain markets. New sales in these
markets have not kept pace with cancellations and as a result, overall customer
retention rates have shown a decline. In addition, operating margins were
impacted by the expenses associated with the rollout of Terminix's new branch
information system. Operating margins for the year decreased 80 basis points
reflecting the expenses related to the new information system as well as
increased expenditures for marketing and health insurance, partially offset by
improved branch efficiencies.
Capital employed increased one percent to support overall business growth.
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AMERICAN HOME SHIELD SEGMENT
The American Home Shield segment reported a 15 percent increase in revenue to
$424 million from $369 million in 2001 and operating income growth of 84 percent
to $48 million compared to $26 million (proforma) in 2001. Revenue growth
reflected increases in all sales channels, complemented by improved customer
retention. Operating margins improved as the segment benefited from strong
volume growth, improved management of service costs and reduced incidence of
claims resulting, in part, from less extreme weather trends.
Capital employed increased 21 percent reflecting the volume growth in the
business resulting in an increased level of required regulatory investments.
ARS/AMS SEGMENT
The ARS/AMS segment reported revenue of $719 million, a decrease of 12 percent
compared with $820 million in 2001. Operating income decreased 65 percent to $17
million, compared with $49 million (proforma) in the prior year. Industry wide
there is a growing trend by consumers to repair rather than replace defective
equipment, reflecting uncertainties in the economy, as well as a marked
reduction in construction activity. A decline in call volume for residential air
conditioning and plumbing service resulted in the Company's decrease in revenue
and profit. Margins declined in part due to higher marketing and insurance
costs. In addition, lower revenue led to reduced leverage of the fixed cost
structure. ARS and AMS continued their efforts towards a comprehensive
rebuilding of marketing and sales strategies and hired a marketing leader as
well as expanded the sales force and sales training. Management realigned its
field operating structure to narrow the span of control.
Capital employed decreased eight percent, reflecting improved working capital
management from a reduction in accounts receivable days sales outstanding.
OTHER OPERATIONS SEGMENT
The Other Operations segment reported segment revenues of $149 million in 2002
compared with $158 million in 2001. The segment reported an operating loss of
$23 million compared with a loss of $342 million (proforma) in 2001. The 2001
results include a charge of $345 million related primarily to goodwill and asset
impairments and other items.
The 2002 results reflected growth in profit from the franchise businesses,
offset by higher costs related to enterprise initiatives and lower profits from
trade name licensing. Revenues from the franchise operations decreased by one
percent. ServiceMaster Clean revenue in 2001 included direct management of a
significant disaster restoration project at the Pentagon, which was, in part,
offset in 2002 by growth in the remaining franchise disaster restoration
business and acquisitions at Merry Maids. Operating margin improvement in the
franchise operations reflected the impact of prior year work at the Pentagon
which was at a lower margin and higher fee income, offset in part by an
increased mix of direct owned branches at Merry Maids, which carry lower margins
than the base franchise business. Total initial and recurring franchise fees
(excluding trade name license agreements) represented 11 percent and 10 percent
of consolidated operating income before impairment charges in 2002 and 2001,
respectively. The portion of total franchise fee income related to initial fees
received from the sales of franchises was not material to the Company's
consolidated financial statements for all periods.
Operating income in the Other Operations segment included income from license
agreements for the use of Company-owned trade names in certain markets. In the
third quarter of 2002, the Company sold its Terminix operations in the United
Kingdom and entered into a two year licensing agreement with the buyer for the
use of the Terminix trade name in the United Kingdom. This agreement was valued
at $6 million and accordingly, a like amount was allocated from the purchase
price. In the fourth quarter of 2001, the Company sold its Management Services
business unit and the Company entered into a three-year licensing agreement with
ARAMARK for the use of the ServiceMaster trade name in certain markets. This
agreement was valued at $15 million and accordingly, a like amount was allocated
from the purchase price. The Company recorded the license fee income in the
fourth quarter of 2001 related to this agreement.
The Other Operations segment increased expenditures in 2002 on technology and
major operational initiatives to improve operating efficiency and build greater
customer and employee satisfaction.
Capital employed in this segment included the discontinued operations and
therefore is significantly reduced from the prior year, reflecting the
divestitures of businesses.
2003 FINANCIAL POSITION AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided from operating activities was $284 million in 2003 compared to
$374 million in 2002. The majority of the difference was experienced in the
first quarter and was largely attributed to the timing of customer prepayments
and the timing of insurance, incentive compensation and vendor payments, with an
increased level of payments in 2003 compared to 2002. TruGreen ChemLawn
typically receives prepayments from certain customers for the full season in the
first and fourth quarters. In preparation for the 2003 season, prepayment
programs were launched earlier than the prior year resulting in an acceleration
of prepayments (and cash flow) from the first quarter of 2003 to the fourth
quarter of 2002. The Company also lowered the prepayment discount it offers
customers, resulting in fewer customers prepaying overall. The Company believes
the profit benefit from a lower discount outweighed the temporary cash flow
benefit from receiving payments earlier. The Company also had an outstanding
year in 2002 relating to receivable collections. Although most businesses
maintained or improved their days sales outstanding in 2003, there was not the
same level of incremental improvement that was experienced in 2002, especially
relating to both TruGreen LandCare and ARS. The Company believes that the cash
flow pattern experienced in 2003 is more indicative of a normalized pattern. In
2004 the Company expects cash from operating activities to increase consistent
with earnings and to continue to substantially exceed net income.
Net cash provided from operating activities has historically exceeded net income
and in 2003 net cash provided from
8
<PAGE>
operating activities was 175% of net income. Three factors contribute to the
Company's strength in its annual cash provided from operating activities: a
solid earnings base, businesses that need relatively little working capital to
fund growth in their operations, and significant annual deferred taxes. The tax
deferral is expected to remain near its current level for another nine years.
Much of this benefit is due to a large base of amortizable intangible assets
which exist for income tax reporting purposes, but not for book purposes, a
significant portion of which arose in connection with the 1997 conversion from a
limited partnership to a corporation.
In the ordinary course, the Company is subject to review by domestic and foreign
taxing authorities, including the Internal Revenue Service ("IRS"). From 1986
through 1997 most operations of the Company were conducted in partnership form,
free of federal corporate income tax. During that period, the Company was not
reviewed by the IRS. In 1997 the Company converted from partnership to corporate
form. In 2003, the IRS notified the Company that it will examine the Company's
consolidated income tax returns for 2002, 2001 and 2000. The Company expects the
IRS to complete its examination in 2005. As with any review of this nature, the
outcome of the IRS examination is not known at this time. The Company believes
it has recorded the appropriate tax provision, tax liabilities and deferred tax
balances.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, which include recurring capital needs and information
technology projects, were below prior year levels. In 2002, there was a
significant payment relating to the residual value guarantees for leases on
assisted living facilities that were subsequently sold. In addition, 2002
capital additions included the new Terminix operating system as well as costs
associated with the Company's headquarters relocation. The Company anticipates
approximately $60 million of capital expenditures in 2004 reflecting systems
enhancements and other initiatives.
In 2003, acquisitions totaled $38 million with the majority at TruGreen
ChemLawn. The cash funding relating to the acquisitions was $29 million with the
remaining amount seller financed.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders in 2003 amounted to $.42 per share, a 2.4%
increase over 2002. This was the 33rd consecutive year of annual growth in
dividends for the Company. Cash dividends in 2003 totaled $125 million, a one
percent increase over 2002, reflecting the per share increase, partially offset
by the impact of share repurchases. The Company records its dividend liability
in the consolidated financial statements on the record date. As of December 31,
2003, the Company had declared a cash dividend of $.105 per share to
shareholders of record on January 9, 2004. In March 2004, the Company declared a
cash dividend of $.105 per share to shareholders of record on April 9, 2004. The
timing and amount of future dividend increases are at the discretion of the
Board of Directors and will depend on, among other things, the Company's capital
structure objectives and cash requirements.
In July 2000, the Board of Directors authorized $350 million for share
repurchases. In 2003, the Company repurchased $86 million of its shares. There
remains approximately $143 million available for repurchases under the July 2000
authorization. The Company expects to repurchase $40 million to $50 million of
shares early in 2004, and then review its operating trends, business acquisition
opportunities and capital needs to determine the subsequent level of share
repurchases. Decisions relating to any future share repurchases will depend on
various factors such as the Company's commitment to maintain investment grade
credit ratings and other strategic investment opportunities.
LIQUIDITY
Cash and short and long-term marketable securities totaled approximately $411
million at December 31, 2003, with approximately $221 million of that amount at
American Home Shield to support regulatory requirements. As a result of strong
cash flows and the net proceeds received from company dispositions, total debt
represents the lowest level in over six years. Total debt at December 31, 2003
was $819 million, down slightly from the 2002 year end level of $835 million.
Approximately 65 percent of the Company's debt matures beyond five years and 35
percent beyond fifteen years. The Company's next public debt maturity is not
until 2005.
The Company is party to a number of debt agreements which require it to maintain
certain financial and other covenants, including limitations on indebtedness
(debt cannot exceed 3.25 times EBITDA, as defined) and interest coverage ratio
(EBITDA needs to exceed four times interest expense). In addition, under certain
circumstances, the agreements may limit the Company's ability to pay dividends
and repurchase shares of common stock. These limitations are not expected to be
a factor in the Company's future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result in the acceleration of the
maturity of the debt. At December 31, 2003, the Company was in compliance with
the covenants and based on its operating outlook for 2004 expects to be able to
maintain compliance in the future. The non-cash impairment charge associated
with goodwill and other intangible assets recorded in the third quarter of 2003
does not affect the Company's compliance with its lending arrangements as its
covenants are not affected by unusual non-cash charges. The Company does not
have any debt agreements that contain put rights or provide for acceleration of
maturity as a result of a change in credit rating.
Management believes that funds generated from operating activities and other
existing resources will continue to be adequate to satisfy ongoing working
capital needs of the Company. The Company has a committed revolving credit
facility for $490 million, which will expire in December 2004. The Company
expects to replace this facility prior to maturity. As of December 31, 2003, the
Company had issued approximately $153 million of letters of credit under the
facility and had unused commitments of approximately $337 million. The Company
also has $550 million of senior unsecured debt and equity securities available
for issuance under an effective shelf registration statement. In addition, the
Company has an arrangement enabling it to sell, on a revolving basis, certain
receivables to unrelated third party purchasers. At December 31, 2003 and 2002,
there were no receivables outstanding that had been sold to third parties. The
agreement is a 364-day facility that is renewable at the option of the
purchasers. The Company may sell up to $65 million of its receivables to these
purchasers in the future and therefore has immediate access to
9
<PAGE>
cash proceeds from these sales. The amount of the eligible receivables varies
during the year based on seasonality of the business and will at times limit the
amount available to the Company.
The Company maintains operating lease facilities with banks totaling $95 million
which provide for the acquisition and development of branch properties to be
leased by the Company. There are residual value guarantees of these properties
for up to 82 percent of their fair market value. At December 31, 2003, there was
approximately $73 million funded under these facilities. Approximately $20
million of these leases have been included on the balance sheet as assets with
related debt as of December 31, 2003 ($15 million as of December 31, 2002). Of
the $95 million available, $80 million expires in October 2004 and $15 million
expires in January 2008. If the Company does not renew the facility that expires
in October 2004, it may be required to purchase the leased assets which total
approximately $53 million.
The majority of the Company's fleet and some equipment is leased through
operating leases. The lease terms are non-cancelable for the first twelve month
term, and then are month-to-month, cancelable at the Company's option. There are
residual value guarantees (ranging from 70 percent to 87 percent depending on
the agreement) on these vehicles and equipment, which historically have not
resulted in significant net payments to the lessors. At December 31, 2003, there
was approximately $241 million of residual value relating to the Company's fleet
and equipment leases.
The following table presents the Company's contractual obligations and
commitments:
(IN MILLIONS) Total < 1 Yr 2-3 Yrs 4-5 Yrs > 5 Yrs
- ------------------------------------------------------------------
Debt balances * $819 $34 $162 $83 $540
Non-cancelable
operating leases 290 72 112 63 43
Purchase
obligations:
Telecommunications 48 24 24 - -
Supply agreements and
other 38 24 7 5 2
Other long-term
liabilities: *
Insurance claims 138 48 49 19 22
Discontinued
operations and other 61 16 10 5 30
- ------------------------------------------------------------------
Total amount $1,394 $218 $364 $175 $637
==================================================================
* These items are reported in the consolidated statements of financial position.
Not included in the table above are deferred income taxes and the related
interest payments on the Company's long-term debt. Deferred taxes total $276
million and are discussed in the footnotes to the consolidated financial
statements. The majority of the Company's debt is fixed rate debt. Therefore,
the Company has calculated the expected interest payments, to be approximately
$60 million, $51 million, $47 million, $45 million, $42 million and $506 million
in 2004, 2005, 2006, 2007, 2008 and thereafter, respectively.
FINANCIAL POSITION - CONTINUING OPERATIONS
Receivables and inventories are slightly above prior year levels, reflecting
general business growth. Deferred customer acquisition costs decreased,
reflecting decreased volume of baiting contracts written at Terminix. The
Company capitalizes sales commissions and other direct contract acquisition
costs relating to termite baiting and pest contracts, as well as home warranty
agreements. Property and equipment decreased slightly, reflecting general
business growth offset by depreciation expense on larger-scale technology
projects. Deferred revenue increased, reflecting growth in warranty contracts
written at American Home Shield and an increased volume of customer prepayments
in the lawn care business. The Company does not have any material capital
commitments at this time.
The Company has minority investors in Terminix. This minority ownership reflects
an interest issued to the prior owners of the Allied Bruce Terminix Companies in
connection with that acquisition. This equity security is convertible into eight
million ServiceMaster common shares. The ServiceMaster shares are included in
the shares used for the calculation of diluted earnings per share.
Total shareholders' equity was $817 million and $1.22 billion at December 31,
2003 and 2002, respectively. The decrease reflects the aforementioned charge for
impaired assets, cash dividends and share repurchases, partially offset by net
income from all other operating sources.
Dividends paid in 2003 on the Company's common stock were not taxable to
shareholders as dividend income for federal income tax purposes, but instead
were treated as a non-taxable return of capital. Under federal tax rules,
dividends are considered taxable only when paid out of current or accumulated
earnings and profits as defined under federal tax laws. As a result of its
December 1997 reincorporation, the Company only began generating corporate
earnings and profits for tax purposes in 1998. Since 1998, earnings and profits
for tax purposes have been reduced by dividend payments, amortization of
intangible assets for tax reporting, deductions relating to business closures
and the timing of certain other tax-related items. The Company currently expects
that approximately 70% of its 2004 dividends on common stock will be taxable as
dividend income for federal income tax purposes. The Company currently expects
that the taxable portion of its dividend income will grow to be fully taxable by
the year 2007.
FINANCIAL POSITION - DISCONTINUED OPERATIONS
The assets and liabilities related to discontinued businesses have been
classified in separate captions on the Consolidated Statements of Financial
Position. Assets from the discontinued operations have declined, reflecting cash
collections on receivables. The decrease in liabilities from discontinued
operations represents a cash adjustment to the selling price of the 2001
disposition of the Company's European pest control and property services
operations as well as certain other payments. The remaining liabilities
primarily represent obligations related to long-term self-insurance claims.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel
prices, insurance costs and medical inflation rates could be significant to
future operating earnings.
The Company does not hold or issue financial instruments for trading or
speculative purposes. The Company has entered into specific financial
arrangements, primarily fuel hedges, in the normal course of business to manage
certain market risks, with a policy of matching positions and limiting the terms
of contracts to relatively short durations. The effect of derivative financial
instrument transactions is not material to the Company's financial statements.
In December 2003 and January 2004, the Company entered into interest rate swap
agreements with a total notional amount of $165 million. Under the terms of
these agreements, the Company pays a floating rate of interest (based on a
specified spread over six-month LIBOR) on the notional amount and the Company
receives a fixed rate of interest at 7.88% on the notional amount. The impact of
these swap transactions was to convert $165 million of the Company's debt from a
fixed rate of 7.88% to a variable rate based on LIBOR.
The Company generally maintains the majority of its debt at fixed rates. After
the effect of the interest swap agreements, approximately 77 percent of total
debt at December 31, 2003 was at a fixed rate. The payments on the approximately
$73 million of funding outstanding under the Company's real estate operating
lease facilities as well as its fleet and equipment operating leases
(approximately $241 million in residual value) are tied to floating interest
rates. The Company's exposure to interest expense based on floating rates is
partially offset by floating rate investment income earned on cash and
marketable securities. The Company believes its overall exposure to interest
rate fluctuations is not material to its overall results of operations.
The Company has several debt and lease agreements where the interest rate or
rent payable under the agreements automatically adjusts based on changes in the
Company's credit ratings. While the Company is not currently expecting a change
in its credit ratings, based on amounts outstanding at December 31, 2003, a one
rating category improvement in the Company's credit ratings would reduce annual
expense by approximately $0.7 million. A one rating category reduction in the
Company's credit ratings would increase expense on an annualized basis by
approximately $1.4 million.
The following table summarizes information about the Company's fixed rate debt
as of December 31, 2003, including the principal cash payments and related
weighted-average interest rates by expected maturity dates. The fair value of
the Company's fixed rate debt was approximately $862 million at December 31,
2003.
Expected Maturity Date
----------------------------------
There-
(In millions) 2004 2005 2006 2007 2008 after Total
- -----------------------------------------------------------------
Fixed rate debt $28 $151 $12 $60 $8 $540 $799
Avg. rate 4.8% 8.3% 6.0% 6.7% 6.1% 7.7% 7.6%
- -----------------------------------------------------------------
As previously discussed, the Company has entered into interest rate swap
agreements, the impact of which was to convert $165 million of the Company's
2009 maturity debt from a fixed rate of 7.88% to a variable rate based on LIBOR.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the financial statements requires management to make certain
estimates and assumptions required under generally accepted accounting
principles which may differ from actual results. The more significant areas
requiring the use of management estimates relate to the allowance for
receivables, accruals for self-insured retention limits related to medical,
workers compensation, auto and general liability insurance claims, accruals for
home warranty claims, the possible outcomes of outstanding litigation, accruals
for income tax liabilities as well as deferred tax accounts, useful lives for
depreciation and amortization expense and the valuation of tangible and
intangible assets. In 2003, there have been no changes in the significant areas
that require estimates or in the methodologies which underlie these estimates.
As discussed in the "Goodwill and Intangible Assets" note to the consolidated
financial statements, in the third quarter of 2003, the Company recorded a
charge to reduce the carrying value of its goodwill and intangible assets.
The allowance for receivables is developed based on several factors including
overall customer credit quality, historical write-off experience and specific
account analyses that project the ultimate collectibility of the outstanding
balance. As such, these factors may change over time causing the reserve level
to vary.
The Company carries insurance policies on insurable risks at levels which it
believes to be appropriate, including workers' compensation, auto and general
liability risks. The Company has self-insured retention limits and insured
layers of excess insurance coverage above those limits. Accruals for
self-insurance losses and warranty claims in the American Home Shield business
are made based on the Company's claims experience and actuarial projections.
Current activity could differ causing a change in estimates. The Company has
certain liabilities with respect to existing or potential claims, lawsuits, and
other proceedings. The Company accrues for these liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Any resulting adjustments, which could be material, are recorded in the period
identified.
The Company records deferred income tax balances based on the net tax effects of
temporary differences between the carrying value of assets and liabilities for
financial reporting purposes and income tax purposes. There are significant
amortizable intangible assets for tax reporting purposes (not for financial
reporting purposes) which arose as a result of the Company's reincorporation
from partnership to corporate form in 1997. The Company records its deferred tax
items based on the estimated ultimate value of the tax basis. The Company's tax
estimates are adjusted when required to reflect changes based on factors such as
changes in tax laws, results of tax authority reviews and statutory limitations.
In the event that actual results differ from these estimates, the Company would
11
<PAGE>
reflect those changes in the period that the difference is identified.
Fixed assets, and intangible assets with finite lives, are depreciated and
amortized on a straight-line basis over their estimated useful lives. These
lives are based on the Company's previous experience for similar assets, the
potential market obsolescence and other industry and business data. The Company
also periodically reviews the assets for impairment and a loss would be recorded
if and when the Company determined that the book value of the asset exceeded its
fair value. Changes in the estimated useful lives or in asset values would cause
the Company to adjust its book value or future expense accordingly. The Company
also reviews its goodwill and trade names at least once a year for impairment.
An impairment loss would be recorded if and when the Company determines that the
expected present value of the future cash flows deemed to be derived from the
asset is less than its corresponding book value.
Revenues from lawn care, pest control, liquid and fumigation termite
applications, as well as heating/air conditioning and plumbing services are
recognized as the services are provided. Revenues from landscaping services are
recognized as they are earned based upon monthly contractual arrangements or
when services are performed for non-contractual arrangements. Revenues from the
Company's commercial installation contracts, primarily relating to HVAC, are
recognized using the percentage of completion method, based on the ratio that
total costs incurred to date bear to total estimated costs. The Company
eradicates termites through the use of baiting stations, as well as through
non-baiting methods (e.g., fumigation or liquid treatments). Termite services
using baiting stations as well as home warranty services typically are sold
through annual contracts for a one-time, upfront payment. Direct costs of these
contracts (service costs for termite contracts and claim costs for warranty
contracts) are expensed as incurred. The Company recognizes revenue over the
life of these contracts in proportion to the expected direct costs. Revenue from
trade name licensing arrangements is recognized when earned. Franchised revenues
consist principally of monthly fee revenue, which is recognized when the related
customer level revenue is reported by the franchisee and collectibility is
assured. Franchise revenue also includes initial fees resulting from the sale of
a franchise. These fees are fixed and are recognized as revenue when
collectibility is assured and all material services or conditions relating to
the sale have been substantially performed.
Customer acquisition costs, which are incremental and direct costs of obtaining
a customer, are deferred and amortized over the life of the related contract in
proportion to revenue recognized. These costs include sales commissions and
direct selling costs which can be shown to have resulted in a successful sale.
NEWLY ISSUED ACCOUNTING STATEMENTS AND POSITIONS:
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
Under this Interpretation, certain entities known as "variable interest
entities" (VIE) must be consolidated by the "primary beneficiary" of the entity.
The primary beneficiary is generally defined as having the majority of the risks
and rewards arising from the VIE. In December 2003, the FASB issued FASB
Interpretation No. 46, Revised December 2003 (FIN 46R), which revised the
originally issued document to include, among other items, additional exclusion
provisions for which an entity would not be required to apply FIN 46. Certain
requirements of FIN 46R are required to be applied no later than the first
quarter of 2004. The Company is currently assessing the impact of FIN 46R and
does not expect its adoption to have a material impact on the Consolidated
Financial Statements.
FORWARD-LOOKING STATEMENTS
THE COMPANY'S ANNUAL REPORT CONTAINS OR INCORPORATES BY REFERENCE STATEMENTS
CONCERNING FUTURE RESULTS AND OTHER MATTERS THAT MAY BE DEEMED TO BE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THE COMPANY INTENDS THAT THESE FORWARD-LOOKING
STATEMENTS, WHICH LOOK FORWARD IN TIME AND INCLUDE EVERYTHING OTHER THAN
HISTORICAL INFORMATION, BE SUBJECT TO THE SAFE HARBORS CREATED BY SUCH
LEGISLATION. THE COMPANY NOTES THAT THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES THAT COULD AFFECT ITS RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR CASH FLOWS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN A FORWARD-LOOKING STATEMENT
INCLUDE THE FOLLOWING (AMONG OTHERS): WEATHER CONDITIONS THAT AFFECT THE DEMAND
FOR THE COMPANY'S SERVICES; COMPETITION IN THE MARKETS SERVED BY THE COMPANY;
LABOR SHORTAGES OR INCREASES IN WAGE RATES; UNEXPECTED INCREASES IN OPERATING
COSTS, SUCH AS HIGHER INSURANCE AND SELF-INSURANCE COSTS, HIGHER HEALTHCARE OR
FUEL PRICES; INCREASED GOVERNMENTAL REGULATION, INCLUDING TELEMARKETING; GENERAL
ECONOMIC CONDITIONS IN THE UNITED STATES, ESPECIALLY AS THEY MAY AFFECT HOME
SALES OR CONSUMER SPENDING LEVELS; TIME AND EXPENSES ASSOCIATED WITH INTEGRATING
AND WINDING DOWN BUSINESSES; AND OTHER FACTORS DESCRIBED FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
12
<PAGE>
<TABLE>
FIVE YEAR FINANCIAL SUMMARY
(In thousands, except per share data) 2003 2002 2001 2000 1999
unaudited
- ---------------------------------------------------------- ------------- ------------- ------------- --------------- --------------
OPERATING RESULTS:
<S> <C> <C> <C> <C> <C>
Operating revenue $3,568,586 $3,500,721 $3,476,811 $3,347,114 $3,008,115
Operating income (loss) (166,243) 335,393 (30,400) 313,762 237,089
PERCENTAGE OF OPERATING REVENUE (4.7%) 9.6% (0.9%) 9.4% 7.9%
Non-operating expense 58,394 93,152 127,527 103,733 86,981
Provision (benefit) for income taxes (2,662) 84,938 14,292 90,008 64,195
------------------------------------------------------------------------
Income (loss) from continuing operations (221,975) 157,303 (172,219) 120,021 85,913
Income (loss) from discontinued operations, net of
income taxes (2,712) (309) 288,603 44,821 66,776
Cumulative effect of accounting change,
net of income taxes - - - (11,161) -
------------------------------------------------------------------------
Net income (loss) $(224,687) $156,994 $116,384 $153,681 $152,689
Earnings (loss) per share:
Basic $(0.76) $0.52 $0.39 $0.51 $0.50
Diluted:
Income (loss) from continuing operations $(0.75) $0.51 $(0.58) $0.39 $0.27
Income (loss) from discontinued operations (0.01) - 0.97 0.15 0.21
Cumulative effect of accounting change - - - (0.04) -
------------------------------------------------------------------------
Diluted earnings (loss) per share $(0.76) $0.51 $0.39 $0.50 $0.49
Shares used to compute basic earnings per share 295,610 300,383 298,659 302,487 307,637
Shares used to compute diluted earnings per share 295,610 305,912 298,659 305,518 314,406
SHARES OUTSTANDING, NET OF TREASURY SHARES 292,868 298,253 300,531 298,474 307,530
Cash dividends per share $0.42 $0.41 $0.40 $0.38 $0.36
Share price range:
High price $12.10 $15.50 $14.20 $14.94 $22.00
Low price $8.95 $8.89 $9.84 $8.25 $10.13
FINANCIAL POSITION:
Current assets $890,774 $925,496 $1,126,266 $701,898 $714,540
Current liabilities 818,240 839,064 805,298 675,902 712,520
Working capital 72,534 86,432 320,968 25,996 2,020
Current ratio 1.1 - 1 1.1 - 1 1.4 - 1 1.0 - 1 1.0 - 1
Total assets $2,956,426 $3,414,938 $3,621,245 $3,939,710 $3,819,687
Total liabilities 2,039,600 2,095,929 2,311,381 2,753,226 2,567,372
TOTAL DEBT OUTSTANDING 819,271 835,475 1,155,193 1,833,556 1,769,298
Minority interest 100,309 100,309 102,677 5,933 2,934
Shareholders' equity 816,517 1,218,700 1,207,187 1,180,551 1,249,381
</TABLE>
13
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For years ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE $3,568,586 $3,500,721 $3,476,811
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold 2,430,523 2,398,952 2,403,197
Selling and administrative expenses 817,719 760,934 688,293
Amortization expense (1) 5,917 7,442 70,890
Charge (credit) for impaired assets and other items (2) 480,670 (2,000) 344,831
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 3,734,829 3,165,328 3,507,211
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (166,243) 335,393 (30,400)
NON-OPERATING EXPENSE (INCOME)
Interest expense (3) 65,255 92,901 133,842
Interest and investment income (15,012) (6,431) (11,972)
Minority interest and other expense, net 8,151 6,682 5,657
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (224,637) 242,241 (157,927)
Provision (benefit) for income taxes (2,662) 84,938 14,292
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (221,975) 157,303 (172,219)
Income (loss) from discontinued operations, net of income taxes (4) (2,712) (309) 288,603
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(224,687) $156,994 $116,384
===================================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $(0.75) $0.52 ($0.58)
Income (loss) from discontinued operations (4) (0.01) - 0.97
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $(0.76) $0.52 $0.39
===================================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $(0.75) $0.51 ($0.58)
Income (loss) from discontinued operations (4) (0.01) - 0.97
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE $(0.76) $0.51 $0.39
===================================================================================================================================
</TABLE>
(1) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets", which eliminates the
amortization of goodwill and intangible assets with indefinite lives
beginning in 2002. Had the provisions of SFAS 142 been applied to 2001,
amortization expense would have been reduced by $60 million ($42 million
after-tax, $0.14 per diluted share).
(2) In accordance with SFAS 142, the Company's goodwill and intangible assets
that are not amortized are subject to at least an annual assessment for
impairment by applying a fair-value based test. During the third quarter of
2003, the Company recorded a non-cash impairment charge associated with
goodwill and intangible assets at its American Residential Services,
American Mechanical Services and TruGreen LandCare business units of $481
million pre-tax ($383 million after-tax). The impact on diluted earnings
per share of this charge was $1.30. See the "Goodwill and Intangible
Assets" note in the Notes to the Consolidated Financial Statements. In
addition, the Company recorded a pre-tax charge of $345 million ($279
million, after-tax) or $.94 per diluted share in the fourth quarter of
2001, related primarily to goodwill and asset impairments as well as other
items.
(3) In 2003, the Company adopted SFAS 145. The primary impact to the Company of
SFAS 145 is that it rescinds SFAS 4 which required all material gains and
losses from the extinguishment of debt to be classified as extraordinary
items. In 2002, the Company recorded an extraordinary loss of $.03 per
diluted share ($15.4 million pre-tax, $9.2 million after-tax) from the
early extinguishment of debt. In 2001 the Company recorded an extraordinary
loss of $.01 per diluted share ($5.9 million pre-tax, $3.4 million
after-tax) on the early extinguishment of debt. As a result of the
Company's adoption of SFAS 145 in 2003, these gains/losses have been
reclassified into continuing operations as interest expense, thereby
adjusting the previously reported 2002 and 2001 income from continuing
operations and related diluted earnings per share from continuing
operations by the same aforementioned amounts.
(4) In the third quarter of 2003, the Company sold the assets and related
operational obligations of the utility line clearing operations of TruGreen
LandCare. The impact of the sale was not material to the Company's
Consolidated Financial Statements for 2003. The results of the utility line
clearing operations have been reclassified as "Discontinued operations" for
all periods presented and are not included in continuing operations.
Earnings per share from continuing operations for 2002 and 2001 were both
reduced by $.01, to reflect the reclassification of the divested utility
line clearing business as discontinued operations.
In the fourth quarter of 2001, the Company's Board of Directors approved a
series of actions related to the strategic review of its portfolio of
businesses that commenced earlier in 2001. These actions included the sale
in November 2001 of the Company's Management Services business as well as
the decision to exit non-strategic and under-performing businesses
including TruGreen LandCare Construction and Certified Systems, Inc., as
well as certain Terminix operations in Europe. During the third quarter of
2002, the Company sold its remaining European Terminix operations. These
operations are classified in "Discontinued operations" for all periods
presented.
See accompanying Notes to the Consolidated Financial Statements.
14
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except per share data)
As of December 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $228,161 $227,177
Marketable securities 90,540 75,194
Receivables, less allowances of $26,220 and $27,616, respectively 333,834 322,954
Inventories 70,163 67,187
Prepaid expenses and other assets 33,408 38,879
Deferred customer acquisition costs 41,806 48,419
Deferred taxes and income taxes receivable 87,589 123,100
Assets of discontinued operations 5,273 22,586
- ------------------------------------------------------------------------------------------------------------
Total Current Assets 890,774 925,496
- ------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
At cost 387,569 388,582
Less: accumulated depreciation (208,054) (200,027)
- ------------------------------------------------------------------------------------------------------------
Net Property and Equipment 179,515 188,555
- ------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill 1,516,206 1,919,780
Intangible assets, primarily trade names 216,453 257,781
Notes receivable 46,441 55,770
Long-term marketable securities 92,562 54,455
Other assets 14,475 13,101
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,956,426 $3,414,938
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable 86,963 90,876
Accrued liabilities:
Payroll and related expenses 89,427 97,819
Self-insured claims and related expenses 73,320 83,225
Other 100,454 102,095
Deferred revenues 419,915 397,290
Liabilities of discontinued operations 14,380 36,624
Current portion of long-term debt 33,781 31,135
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 818,240 839,064
- ------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 785,490 804,340
LONG-TERM LIABILITIES
Deferred taxes 276,000 312,500
Liabilities of discontinued operations 34,396 30,682
Other long-term obligations 125,474 109,343
- ------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 435,870 452,525
- ------------------------------------------------------------------------------------------------------------
MINORITY INTEREST 100,309 100,309
COMMITMENTS AND CONTINGENCIES (See Note)
SHAREHOLDERS' EQUITY
Common stock $0.01 par value, authorized 1,000,000 shares; issued
317,315 and 316,024, respectively 3,173 3,160
Additional paid-in capital 1,061,640 1,054,272
Retained earnings 6,365 355,893
Accumulated other comprehensive income (loss) 7,932 (849)
Restricted stock (4,368) (1,988)
Treasury stock (258,225) (191,788)
- ------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 816,517 1,218,700
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,956,426 $3,414,938
============================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
15
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
Additional Accumulated
Common Paid-in Retained Comprehensive Treasury Restricted Total
Stock Capital Earnings Income Stock Stock Equity
(Loss)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 2000 $3,137 $1,032,287 $324,727 $(9,277) $(168,494) $(1,829) $1,180,551
===================================================================================================================================
Net income 2001 116,384 116,384
Other comprehensive income, net of tax:
Net unrealized (loss) on securities,
net of reclassification adjustment (1) (4,359) (4,359)
Foreign currency translation 11,140 11,140
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 116,384 6,781 123,165
Shareholder dividends (119,008) (119,008)
Shares issued under options
debentures, grant plans and
other (2,142 shares) 8 6,941 15,590 1,248 23,787
Treasury shares purchased (124 shares) (1,308) (1,308)
===================================================================================================================================
BALANCE DECEMBER 31, 2001 $3,145 $1,039,228 $322,103 $(2,496) $(154,212) $(581) $1,207,187
===================================================================================================================================
Net income 2002 156,994 156,994
Other comprehensive income, net of tax:
Net unrealized (loss) on securities,
net of reclassification adjustment (1) (3,869) (3,869)
Foreign currency translation 5,516 5,516
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 156,994 1,647 158,641
Shareholder dividends (123,204) (123,204)
Shares issued under options,
debentures, grant plans and
other (2,706 shares) 15 15,044 14,482 (1,407) 28,134
Treasury shares purchased (4,985 shares) (52,058) (52,058)
===================================================================================================================================
BALANCE DECEMBER 31, 2002 $3,160 $1,054,272 $355,893 $(849) $(191,788) $(1,988) $1,218,700
===================================================================================================================================
Net loss 2003 (224,687) (224,687)
Other comprehensive income, net of tax:
Net unrealized gain on securities,
net of reclassification adjustment (1) 7,022 7,022
Foreign currency translation 1,759 1,759
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) (224,687) 8,781 (215,906)
Shareholder dividends (124,841) (124,841)
Shares issued under options,
debentures, grant plans and
other (2,700 shares) 13 7,368 19,144 (2,380) 24,145
Treasury shares purchased (8,084 shares) (85,581) (85,581)
===================================================================================================================================
BALANCE DECEMBER 31, 2003 $3,173 $1,061,640 $6,365 $7,932 $(258,225) $(4,368) $816,517
===================================================================================================================================
</TABLE>
(1) Disclosure of reclassification amounts (net of tax) relating to
comprehensive income:
<TABLE>
2003 2002 2001
===================================================================================================================================
<S> <C> <C> <C>
Unrealized holding gains (losses) arising $ 9,335 $(4,745) $(1,219)
in period
Less: (Gains) losses realized (2,313) 876 (3,140)
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ 7,022 $(3,869) $(4,359)
===================================================================================================================================
See accompanying Notes to the Consolidated Financial Statements.
</TABLE>
16
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For years ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1 $227,177 $402,642 $42,834
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) (224,687) 156,994 116,384
Adjustments to reconcile net income (loss) to net cash
provided from operating activities:
(Income) loss from discontinued operations 2,712 309 (288,603)
Charge (credit) for impaired assets and other items, net of tax 383,152 (1,200) 279,393
Depreciation expense 49,861 48,866 48,020
Amortization expense 5,917 7,442 70,890
Deferred income tax expense 65,256 65,799 88,470
Change in working capital, net of acquisitions:
Receivables (17,640) 14,408 (2,370)
Inventories and other current assets 5,946 (7,694) (14,650)
Accounts payable (4,168) (4,233) (4,762)
Deferred revenues 22,773 49,849 35,750
Accrued liabilities (6,884) 33,699 23,004
Other, net 1,300 9,952 4,623
==============================================================================================================================
NET CASH PROVIDED FROM OPERATING ACTIVITIES 283,538 374,191 356,149
==============================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (39,243) (60,113) (41,504)
Sale of equipment and other assets 11,090 4,565 9,777
Business acquisitions, net of cash acquired (28,875) (13,003) (55,842)
Proceeds from business sales 21,106 30,500 857,166
Notes receivable, financial investments and securities (23,499) (2,117) (15,361)
==============================================================================================================================
NET CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES (59,421) (40,168) 754,236
==============================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of debt (31,216) (345,142) (719,963)
Shareholders' dividends (124,841) (123,204) (119,008)
Purchase of ServiceMaster stock (85,581) (52,058) (1,308)
Other, net 16,330 19,140 13,970
==============================================================================================================================
NET CASH USED FOR FINANCING ACTIVITIES (225,308) (501,264) (826,309)
==============================================================================================================================
NET CASH PROVIDED FROM (USED FOR) DISCONTINUED OPERATIONS 2,175 (8,224) 75,732
==============================================================================================================================
CASH INCREASE (DECREASE) DURING THE YEAR 984 (175,465) 359,808
==============================================================================================================================
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $228,161 $227,177 $402,642
==============================================================================================================================
See accompanying Notes to the Consolidated Financial Statements.
</TABLE>
17
<PAGE>
SIGNIFICANT ACCOUNTING POLICIES
SUMMARY: The consolidated financial statements include the accounts of
ServiceMaster and its majority-owned subsidiary partnerships and corporations,
collectively referred to as the Company. Intercompany transactions and balances
have been eliminated.
The preparation of the consolidated financial statements requires management to
make certain estimates and assumptions required under generally accepted
accounting principles ("GAAP") which may differ from actual results. The more
significant areas requiring the use of management estimates relate to the
allowance for receivables, accruals for self-insured retention limits related to
medical, workers compensation, auto and general liability insurance, accruals
for home warranty claims, the possible outcomes of outstanding litigation,
accruals for income tax liabilities as well as deferred tax accounts, useful
lives for depreciation and amortization expense, and the valuation of tangible
and intangible assets. In 2003, there have been no changes in the significant
areas that require estimates or in the methodologies which underlie these
estimates. As discussed in the "Goodwill and Intangible Assets" note to the
consolidated financial statements, the Company recorded a charge to reduce the
carrying value of its goodwill and intangible assets. This impairment charge
represented the excess of the book values over their corresponding estimated
fair values.
The allowance for receivables is developed based on several factors including
overall customer credit quality, historical write-off experience and specific
account analyses that project the ultimate collectibility of the outstanding
balances. As such, these factors may change over time causing the reserve level
to vary.
The Company carries insurance policies on insurable risks at levels which it
believes to be appropriate, including workers' compensation, auto and general
liability risks. The Company has self-insured retention limits and insured
layers of excess insurance coverage above those limits. Accruals for
self-insurance losses and warranty claims in the American Home Shield business
are made based on the Company's claims experience and actuarial projections.
Current activity could differ causing a change in estimates. The Company has
certain liabilities with respect to existing or potential claims, lawsuits, and
other proceedings. The Company accrues for these liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
Any resulting adjustments, which could be material, are recorded in the period
identified.
The Company records deferred income tax balances based on the net tax effects of
temporary differences between the carrying value of assets and liabilities for
financial reporting purposes and income tax purposes. There are significant
amortizable intangible assets for tax reporting purposes (not for financial
reporting purposes) which arose as a result of the Company's reincorporation
from partnership to corporate form in 1997. The Company records its deferred tax
items based on the estimated ultimate value of the tax basis. The Company's tax
estimates are adjusted when required to reflect changes based on factors such as
changes in tax laws, results of tax authority reviews and statutory limitations.
In the event that actual results differ from these estimates, the Company would
reflect those changes in the period that the difference is identified.
Fixed assets and intangible assets with finite lives are depreciated and
amortized on a straight-line basis over their estimated useful lives. These
lives are based on the Company's previous experience for similar assets, the
potential for market obsolescence and other industry and business data. An
impairment loss would be recognized if and when the undiscounted future cash
flows derived from the asset are less than its carrying amount. Changes in the
estimated useful lives or in the asset values could cause the Company to adjust
its book value or future expense accordingly.
The Company does not amortize its goodwill or indefinite-lived intangible
assets. The Company tests these assets for impairment, at a minimum, on an
annual basis by applying a fair-value based test. An impairment loss would be
recorded if and when the Company determines that the expected present value of
the future cash flows is less than the book value.
REVENUES: Revenues from lawn care, pest control, liquid and fumigation termite
applications, as well as heating/air conditioning and plumbing services are
recognized as the services are provided. Revenues from landscaping services are
recognized as they are earned based upon monthly contractual arrangements or
when services are performed for non-contractual arrangements. Revenues from the
Company's commercial installation contracts, primarily relating to HVAC, are
recognized using the percentage of completion method based on the ratio that
total costs incurred to date bear to total estimated costs. The Company
eradicates termites through the use of baiting stations, as well as through
non-baiting methods (e.g., fumigation or liquid treatments). Termite services
using baiting stations as well as home warranty services typically are sold
through annual contracts for a one-time, upfront payment. Direct costs of these
contracts (service costs for termite contracts and claim costs for warranty
contracts) are expensed as incurred. The Company recognizes revenue over the
life of these contracts in proportion to the expected direct costs. Revenue from
trade name licensing arrangements is recognized when earned. Franchised revenues
(which in the aggregate represent less than three percent of consolidated
revenue) consist principally of continuing monthly fees based upon the
franchisee's customer level revenue. Monthly fee revenue is recognized when the
related customer level revenue is reported by the franchisee and collectibility
is assured. Franchise revenue also includes initial fees resulting from the sale
of a franchise. These fees are fixed and are recognized as revenue when
collectibility is assured and all material services or conditions relating to
the sale have been substantially performed. Total franchise fee income
(excluding trade name licensing) comprised 13 percent, 11 percent and 10 percent
of consolidated operating income before impairment charges in 2003, 2002 and
2001, respectively. The portion of total franchise fee income related to initial
fees received from the sale of a franchise were immaterial to the Company's
consolidated financial statements for all periods.
18
<PAGE>
The Company had $420 million and $397 million of deferred revenues at December
31, 2003 and 2002, respectively, which consist primarily of payments received
for annual contracts relating to home warranty, termite baiting and lawn care
services. The revenue related to these services is recognized as the service is
performed over the contractual period.
DEFERRED CUSTOMER ACQUISITION COSTS: Customer acquisition costs, which are
incremental and direct costs of obtaining a customer, are deferred and amortized
over the life of the related contract in proportion to revenue recognized. These
costs include sales commissions and direct selling costs which can be shown to
have resulted in a successful sale.
INTERIM REPORTING: TruGreen ChemLawn has significant seasonality in its
business. In the winter and early spring, this business sells a series of lawn
applications to customers which are rendered primarily in March through October.
The Company incurs incremental selling expenses at the beginning of the year
that directly relate to successful sales in which the revenues will be
recognized in later quarters. This business also defers, on an interim basis,
pre-season advertising costs and annual repairs and maintenance procedures that
are performed in the first quarter. These costs are deferred and recognized in
proportion to the contract revenue over the production season, and are not
deferred beyond the calendar year-end.
ADVERTISING: As discussed in the "Interim Reporting" note above, TruGreen's
pre-season advertising costs are deferred and recognized approximately in
proportion to the contract revenue over the year. The cost of direct-response
advertising at Terminix is capitalized and amortized over its expected period of
future benefits. This direct-response advertising consists primarily of
direct-mail promotions, for which the cost is capitalized and amortized over the
one-year customer contract life. For all other advertising, the Company expenses
the cost of advertising the first time the advertising takes place. Terminix
also defers its advertising costs in the first quarter and recognizes expense
over the year. These costs are not deferred beyond the calendar year-end.
INVENTORY VALUATION: Inventories are valued at the lower of cost (first-in,
first-out basis) or market. The inventory primarily represents finished goods to
be used on the customers' premises or sold to franchisees.
PROPERTY AND EQUIPMENT, INTANGIBLE ASSETS AND GOODWILL: Buildings and equipment
used in the business are stated at cost and depreciated over their estimated
useful lives using the straight-line method for financial reporting purposes.
The estimated useful lives for building and improvements range from 10 to 40
years, while the estimated useful lives for equipment range from three to 10
years. Leasehold improvements relating to leased facilities are depreciated over
the remaining life of the lease. Technology equipment as well as software and
development have an estimated useful life of three to seven years. Intangible
assets consist primarily of goodwill ($1.5 billion), trade names ($205 million)
and other intangible assets ($12 million). As required by SFAS 142 beginning in
2002, goodwill is not subject to amortization and intangible assets with
indefinite useful lives are not amortized until their useful lives are
determined to no longer be indefinite. Goodwill and intangible assets that are
not subject to amortization are subject to an assessment for impairment by
applying a fair-value based test on an annual basis or more frequently if
circumstances indicate a potential impairment. As discussed in the "Goodwill and
Intangible Assets" note to the consolidated financial statements, during the
third quarter of 2003 the Company recorded a pre-tax non-cash impairment charge
of $481 million relating to TruGreen LandCare, ARS and AMS.
As discussed in the "Portfolio Review and Dispositions in 2001" section in the
Notes to Consolidated Financial Statements, in the course of completing its
portfolio review, the Company recorded impairment charges in 2001 related to
goodwill of TruGreen LandCare and the United Kingdom Terminix operations. The
impairment losses recorded were the excess of the recorded book values over
their corresponding estimated fair values.
As required by SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company's long-lived assets, including fixed assets and intangible
assets (other than goodwill), are tested for recoverability whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. Based on these reviews, when the undiscounted future cash flows
derived from using the asset are less than the carrying amount of the asset, an
impairment loss is recognized based on the asset's fair value, and the carrying
amount of the asset is reduced accordingly.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK: The carrying amounts of
receivables, accounts payable, and accrued liabilities approximate fair value
because of the short maturity of these instruments. The carrying amounts of
long-term receivables approximate fair value as the effective rates for these
instruments are comparable to market rates at year-end. The carrying amount of
current and long-term marketable securities also approximate fair value, with
unrealized gains and losses reported net-of-tax as a component of accumulated
comprehensive income (loss). The carrying amount of total debt is $819 million
and $835 million and the estimated fair value is approximately $882 million and
$880 million at December 31, 2003 and 2002, respectively. The estimated fair
value of debt is based upon borrowing rates currently available to the Company
for long-term borrowings with similar terms and maturities.
The Company does not hold or issue financial instruments for trading or
speculative purposes. The Company has entered into specific financial
arrangements in the normal course of business to manage certain market risks,
with a policy of matching positions and limiting the terms of contracts to
relatively short durations. The effect of derivative financial instrument
transactions is not material to the Company's consolidated financial statements.
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company's interest rate swap agreements are classified as fair
value hedges and, as such, gains and losses on the swaps as well as the gains
and losses on the related hedged items are recognized in current earnings.
19
<PAGE>
Financial instruments, which potentially subject the Company to financial and
credit risk, consist principally of investments and receivables. Investments
consist primarily of publicly traded debt and common equity securities. The
Company periodically reviews its portfolio of investments to determine whether
there has been an other than temporary decline in the value of the investments
from factors such as deterioration in the financial condition of the issuer or
the market(s) in which it competes. Receivables have little concentration of
credit risk due to the large number of customers with relatively small balances
and their dispersion across geographical areas. The Company maintains an
allowance for losses based upon the expected collectibility of receivables.
INCOME TAXES: The Company accounts for income taxes under SFAS 109, "Accounting
for Income Taxes." This statement uses an asset and liability approach for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Deferred income taxes are
provided to reflect the differences between the ultimate tax bases of assets and
liabilities and their reported amounts in the financial statements.
EARNINGS PER SHARE: Basic earnings per share is based on the weighted-average
number of common shares outstanding during the year. The weighted average number
of common shares used in the diluted earnings per share calculation include the
incremental effect related to outstanding options whose market price is in
excess of the exercise price, as well as shares potentially issuable under
convertible securities. In computing diluted earnings per share, the after-tax
interest expense related to convertible debentures is added back to net income
in the numerator, while the number of shares used in the denominator include the
shares issuable upon conversion of the debentures. Due to the fact that losses
from continuing operations were incurred in 2003 and 2001, diluted shares do not
include the effects of options, because doing so would result in a less dilutive
computation. Shares potentially issuable under convertible securities have not
been considered outstanding in the diluted earnings per share computation for
all periods presented as the inclusion would result in a less dilutive
computation.
STOCK-BASED COMPENSATION: Beginning in 2003, the Company is accounting for
employee stock options as compensation expense in accordance with SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123", provides alternative methods of transitioning to the fair-value based
method of accounting for employee stock options as compensation expense. The
Company is using the "prospective method" of SFAS 148 and is expensing the fair
value of new employee option grants awarded subsequent to 2002.
Prior to 2003, the Company had accounted for employee share options under the
intrinsic method of Accounting Principles Board Opinion 25, as permitted under
GAAP. Had compensation expense for employee options been determined under the
fair-value based method of SFAS 123 for all periods, proforma reported net
income and net earnings per share would reflect the following:
(In thousands, except per share data) 2003 2002 2001
- ------------------------------------------------------------------------
Net income (loss) as reported $(224,687) $156,994 $116,384
Add back: Stock-based
compensation expense included in
reported net income, net of related
tax effects 609 - -
Deduct: Stock-based
compensation expense determined
under fair-value method, net
of related tax effects (6,179) (7,576) (7,613)
- ------------------------------------------------------------------------
Proforma net income (loss) $(230,257) $149,418 $108,771
Basic Earnings Per Share:
As reported $(0.76) $0.52 $0.39
Proforma (0.78) 0.50 0.36
Diluted Earnings Per Share:
As reported $(0.76) $0.51 $0.39
Proforma (0.78) 0.49 0.36
========================================================================
SEE THE "SHAREHOLDERS' EQUITY" NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR
A DESCRIPTION OF THE ASSUMPTIONS USED TO COMPUTE THE ABOVE STOCK BASED
COMPENSATION EXPENSE.
NEWLY ADOPTED ACCOUNTING PRINCIPLES: In April 2002, the Financial Accounting
Standards Board (FASB) issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". The
primary impact to the Company of this Statement is that it rescinds SFAS 4 which
required all material gains and losses from the extinguishment of debt to be
classified as extraordinary items. SFAS 145 requires that the more restrictive
criteria of APB Opinion No. 30 will be used to determine whether such gains or
losses are extraordinary. Beginning in 2003, the Company adopted the provisions
of this statement and as such has reclassified the extraordinary losses in 2002
and 2001 into income from continuing operations in the accompanying Consolidated
Statements of Operations. In the second quarter of 2002, the Company recorded an
extraordinary loss of $.03 per diluted share ($15.4 million pre-tax, $9.2
million after-tax) from the early extinguishment of debt. In the first quarter
of 2001 the Company recorded an extraordinary gain of $.02 per diluted share
($10.1 million pre-tax, $6.0 million after-tax) on the early extinguishment of
debt. In the fourth quarter of 2001 the Company recorded an extraordinary loss
of $.03 per diluted share ($16.0 million pre-tax, $9.4 million after-tax) on the
early extinguishment of debt. As a result of the Company's adoption of SFAS 145
in 2003, these gains/losses have been reclassified into continuing operations as
interest expense, thereby adjusting the previously reported 2002 and 2001 basic
and diluted earnings per share from continuing operations by the same
aforementioned amounts.
During 2003, the Company adopted SFAS 146, "Accounting for Costs Associated With
Exit or Disposal Activities". This Statement requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. The adoption of this Statement did not have a material impact on the
Consolidated Financial Statements.
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
Under this Interpretation,
20
<PAGE>
certain entities known as "variable interest entities" (VIE) must be
consolidated by the "primary beneficiary" of the entity. The primary beneficiary
is generally defined as having the majority of the risks and rewards arising
from the VIE. In December 2003, the FASB issued FASB Interpretation No. 46,
Revised, which revised the originally issued document to include, among other
items, additional exclusion provisions for which an entity would not be required
to apply FIN 46. Certain requirements of FIN 46R are required to be applied no
later than the first quarter of 2004. The Company is currently assessing the
impact of FIN 46R and does not expect its adoption to have a material impact on
the Consolidated Financial Statements.
BUSINESS SEGMENT REPORTING
The business of the Company is conducted through five operating segments:
TruGreen, Terminix, American Home Shield, ARS/AMS and Other Operations. In
accordance with Statement of Financial Accounting Standards No. 131, the
Company's reportable segments are strategic business units that offer different
services. The TruGreen segment provides residential and commercial lawn care and
landscaping services through the TruGreen ChemLawn and TruGreen LandCare
companies. The Terminix segment provides termite and pest control services to
residential and commercial U.S. customers. The American Home Shield segment
provides home warranties to consumers that cover heating, ventilation, air
conditioning (HVAC), plumbing and other home systems and appliances. This
segment also includes home inspection services provided by AmeriSpec. The
ARS/AMS segment provides HVAC and plumbing installation and repair services
provided under the ARS Service Express, American Mechanical Services and Rescue
Rooter brand names. The Other Operations segment includes the franchise and
company-owned operations of ServiceMaster Clean, Furniture Medic and Merry
Maids, which provide disaster restoration, cleaning, furniture repair and maid
services. This segment also includes the Company's headquarters operations,
which provide various technology, marketing, finance and other support services
to the business units. In the third quarter of 2003 the Company sold
substantially all of the assets and related operational obligations of the
utility line clearing operations of TruGreen LandCare. As a result, the utility
line clearing operations are now included in "Discontinued Operations" for all
periods presented.
Information regarding the accounting policies used by the Company is described
in the Significant Accounting Policies Note. The Company derives substantially
all of its revenues from customers in the United States with less than one
percent generated in foreign markets. Operating expenses of the business units
consist primarily of direct costs. Identifiable assets are those used in
carrying out the operations of the business unit and include intangible assets
directly related to its operations.
Segment information for the years ended December 31, 2003, 2002, and 2001 is
presented below.
Beginning in 2002, SFAS 142, "Goodwill and Other Intangible Assets", eliminates
the amortization of goodwill and intangible assets with indefinite lives. The
table below presents "Proforma" information for 2001 which eliminates
amortization expense related to goodwill and intangible assets with indefinite
lives, so that these periods are presented on a comparable basis to the 2003 and
2002 information.
21
<PAGE>
<TABLE>
BUSINESS SEGMENT TABLE
(In thousands) 2003 % Change 2002 % Change 2001
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
TruGreen $1,347,400 5% $1,284,616 0% $1,284,136
Terminix 945,258 2 924,384 9 845,453
American Home Shield 450,264 6 423,526 15 368,951
ARS/AMS 673,558 (6) 718,892 (12) 820,177
Other Operations 152,106 2 149,303 N/M 158,094
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Revenue $3,568,586 2% $3,500,721 1% $3,476,811
===========================================================================================================================
OPERATING INCOME (LOSS):
TruGreen (1) $(34,017) N/M $165,292 12% $147,078
Terminix 131,044 3 127,441 23 103,925
American Home Shield 58,154 21 47,890 104 23,512
ARS/AMS (1) (281,777) N/M 17,342 (57) 39,978
Other Operations (2) (39,647) N/M (22,572) N/M (344,893)
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) (1,2) $(166,243) N/M $335,393 N/M $(30,400)
===========================================================================================================================
OPERATING INCOME (LOSS) - SFAS 142 PROFORMA:
TruGreen (1) $(34,017) N/M $165,292 (5%) $173,453
Terminix 131,044 3 127,441 4 122,979
American Home Shield 58,154 21 47,890 84 25,993
ARS/AMS (1) (281,777) N/M 17,342 (65) 49,210
Other Operations (2) (39,647) N/M (22,572) N/M (341,582)
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) - SFAS 142 Proforma (1,2) $(166,243) N/M $335,393 N/M $30,053
===========================================================================================================================
CAPITAL EMPLOYED: (3)
TruGreen $821,412 (16%) $979,932 (4%) $1,018,223
Terminix 596,535 - 599,433 1 594,970
American Home Shield 134,372 34 100,026 21 82,374
ARS/AMS 86,764 (78) 398,982 (8) 431,756
Other Operations 97,014 27 76,111 (77) 337,734
- ---------------------------------------------------------------------------------------------------------------------------
Total Capital Employed $1,736,097 (19%) $2,154,484 (13%) $2,465,057
===========================================================================================================================
IDENTIFIABLE ASSETS:
TruGreen $911,958 (13%) $1,053,099 (1%) $1,066,001
Terminix 822,407 (2) 841,437 2 823,333
American Home Shield 422,765 12 376,059 16 323,229
ARS/AMS 185,528 (62) 489,366 (6) 519,026
Other Operations 613,768 (6) 654,977 (26) 889,656
- ---------------------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $2,956,426 (13%) $3,414,938 (6%) $3,621,245
===========================================================================================================================
DEPRECIATION & AMORTIZATION EXPENSE:
TruGreen $22,764 (4%) $23,595 (54%) $51,247
Terminix 10,328 (7) 11,150 (64) 30,822
American Home Shield 6,829 22 5,583 (26) 7,516
ARS/AMS 8,439 (8) 9,166 (49) 18,048
Other Operations 7,418 9 6,814 (40) 11,277
- ---------------------------------------------------------------------------------------------------------------------------
Total Depreciation & Amortization Expense $55,778 (1%) $56,308 (53%) $118,910
===========================================================================================================================
CAPITAL EXPENDITURES:
TruGreen $14,197 25% $11,317 106% $5,504
Terminix 5,169 (70) 17,013 63 10,427
American Home Shield 6,619 38 4,794 (40) 8,033
ARS/AMS 6,160 9 5,658 (20) 7,093
Other Operations 7,098 (67) 21,331 104 10,447
- ---------------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $39,243 (35%) $60,113 45% $41,504
===========================================================================================================================
N/M = Not meaningful
</TABLE>
(1) In the third quarter of 2003, the Company recorded a non-cash, pre-tax
impairment charge of $481 million related to its goodwill and intangible
assets. Approximately $189 million of the charge is associated with the
TruGreen LandCare operations reported in the TruGreen segment, and the
remaining $292 million relates to the ARS/AMS segment.
(2) In the fourth quarter of 2001, the Company recorded a pre-tax charge of
$345 million, related primarily to goodwill and asset impairments as well
as other items reported in the Other Operations segment.
(3) Capital employed represents the segments total assets less liabilities
(exclusive of debt balances).
The following table summarizes the previously amortized goodwill by segment at
December 31 that, beginning on January 1, 2002 is no longer amortized. See the
"Acquisition" and "Dispositions" Notes to the Consolidated Financial Statements
for information relating to goodwill acquired and amounts impaired.
<TABLE>
(In thousands) 2003 % Change 2002 % Change 2001
===================================================================================================
<S> <C> <C> <C> <C> <C>
TruGreen $652,534 (16%) $780,043 1% $774,400
Terminix 622,351 1 618,055 1 613,708
American Home Shield 72,085 - 72,085 - 72,085
ARS/AMS 56,171 (83) 337,491 - 337,386
Other Operations 113,065 1 112,106 5 106,599
- ---------------------------------------------------------------------------------------------------
Total $1,516,206 (21%) $1,919,780 1% $1,904,178
===================================================================================================
</TABLE>
22
<PAGE>
GOODWILL AND INTANGIBLE ASSETS
In accordance with SFAS 142, "Goodwill and Other Intangible Assets", the Company
discontinued the amortization of goodwill and indefinite lived intangible assets
effective January 1, 2002. Goodwill and intangible assets that are not amortized
are subject to assessment for impairment by applying a fair-value based test on
an annual basis or more frequently if circumstances indicate a potential
impairment. The Company's annual assessment date is October 1.
Throughout the first half of the year, management believed that the significant
declines in the operating results of these businesses were due to temporary
conditions and that the operations, with an anticipated good summer season,
would show ongoing improvement which would support the amount of goodwill and
intangible assets on the balance sheet. The Company had discussed such events
and trends in its press releases and periodic filings with the Securities and
Exchange Commission. In the third quarter of 2003, the results did not improve.
In addition, the Company identified certain branch closures at ARS and announced
the sale of its utility line clearing operations at TruGreen LandCare. The lack
of a good summer season, combined with declining profitability in the base
businesses, led management to conclude that the businesses were unlikely to meet
the previous projections which had supported the carrying value. As a result,
the Company recorded a non-cash impairment charge to reduce the carrying value
of the assets to $56 million, their estimate fair value.
A valuation was performed during the third quarter of 2003 which incorporated
third quarter 2003 performance. The fair value of goodwill and other intangible
assets was determined primarily by utilizing a discounted cash flow methodology.
Based on the evaluation, it was determined that the fair value of the Company's
goodwill and intangible assets was less than their carrying value. The Company
used an independent valuation firm to confirm the Company's assessment of the
fair value of its goodwill and other intangible assets. In the third quarter of
2003, the Company recorded a non-cash impairment charge totaling $481 million
pre-tax or $383 million net of tax. The charge consisted of $224 million at
American Residential Services, $68 million at American Mechanical Services and
$189 million at TruGreen LandCare. The impairment charge included a portion of
goodwill that was not deductible for tax purposes, resulting in a tax benefit of
$98 million or approximately 20 percent of the pre-tax charge amount.
In accordance with SFAS 142, the following table provides summarized
transitional information for the years ended December 31, 2003, 2002 and 2001,
with the 2001 information presented on an adjusted basis to reflect the
elimination of amortization expense required under SFAS 142:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001
- --------------------------------------------------------------------------------
Reported operating income (loss) $(166,243) $335,393 ($30,400)
Add back: Goodwill and trade name
amortization - - 60,453
- --------------------------------------------------------------------------------
Operating income (loss) as adjusted
under SFAS 142 $(166,243) $335,393 $30,053
================================================================================
Reported income (loss)
from continuing operations $(221,975) $157,303 ($172,219)
Add back: Goodwill and trade name
amortization, net of tax - - 41,590
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations as adjusted
under SFAS 142 (221,975) 157,303 (130,629)
Discontinued operations, net of taxes (2,712) (309) 288,603
- --------------------------------------------------------------------------------
Net income (loss) as adjusted
under SFAS 142 $(224,687) $156,994 $157,974
================================================================================
Reported basic earnings per share
from continuing operations $(0.75) $0.52 ($0.58)
Add back: Goodwill and trade name
amortization, net of tax - - 0.14
- --------------------------------------------------------------------------------
Basic earnings per share
from continuing operations
as adjusted under SFAS 142 (0.75) 0.52 (0.44)
Discontinued operations, net (0.01) - 0.97
- --------------------------------------------------------------------------------
Basic earnings per share as adjusted
under SFAS 142 $(0.76) $0.52 $0.53
================================================================================
Reported diluted earnings per share
from continuing operations $(0.75) $0.51 ($0.58)
Add back: Goodwill and trade name
amortization, net of tax - - 0.14
- --------------------------------------------------------------------------------
Diluted earnings per share
from continuing operations
as adjusted under SFAS 142 (0.75) 0.51 (0.44)
Discontinued operations, net (0.01) - 0.97
- --------------------------------------------------------------------------------
Diluted earnings per share as adjusted
under SFAS 142 $(0.76) $0.51 $0.53
================================================================================
23
<PAGE>
The following table summarizes goodwill and intangible asset balances:
2003 2002 2001
- ------------------------------------------------------------------------------
(In thousands)
Goodwill (1) $1,516,206 $1,919,780 $1,904,178
Trade names (1) 204,793 238,550 238,550
Other intangible assets (3) 35,432 78,284 74,197
Accumulated amortization (2,3) (23,772) (59,053) (51,611)
- ------------------------------------------------------------------------------
Net other intangibles 11,660 19,231 22,586
- ------------------------------------------------------------------------------
Total $1,732,659 $2,177,561 $2,165,314
==============================================================================
(1) Not subject to amortization.
(2) Amortization expense of $6 million, $7 million and $71 million was recorded
in 2003, 2002 and 2001, respectively. Annual amortization expense of
approximately $6 million in 2003 is expected to decline over the next five
years.
(3) In the first quarter of 2003, the Company reviewed its intangible balances
and removed the fully amortized assets as well as the related accumulated
amortized balance on the financial statements. During this process certain
reclassifications between categories were made.
24
<PAGE>
INCOME TAXES
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the Company's effective income tax rate for continuing operations is as
follows:
2003 2002 2001
=====================================================================
Tax at U.S.
Federal statutory rate (35.0%) 35.0% (35.0%)
State and local income taxes
net of U.S. federal benefit (0.8) 3.5 0.9
Net operating loss and
tax credits (0.5) (4.1) (1.8)
Impairment of non-
deductible goodwill 36.9 - 39.9
Non-deductible amortization
expense - - 2.4
Other (1.8) 0.7 2.7
- ---------------------------------------------------------------------
Effective rate (1.2%) 35.1% 9.1%
=====================================================================
The effective tax rate for discontinued operations reflected a benefit of 39.5%
and 32.4%, in 2003 and 2002, respectively, and a 44.6% provision in 2001. The
difference between these rates and the federal statutory tax rate of 35%
reflects state taxes, net of federal benefit, the impairment of non-deductible
goodwill in 2003 and 2001, and permanent items, primarily amortization expense
in 2001.
Income tax expense from continuing operations is as follows:
(In thousands) 2003
----------------------------------
CURRENT DEFERRED TOTAL
U.S. federal $9,820 $(8,963) $857
State and local (1,618) (1,901) (3,519)
- -----------------------------------------------------------
$8,202 $(10,864) $(2,662)
===========================================================
2002
-----------------------------------
Current Deferred Total
U.S. federal $26,668 $48,998 $75,666
State and local (1,121) 10,393 9,272
- ------------------------------------------------------------
$25,547 $59,391 $84,938
============================================================
2001
-----------------------------------
Current Deferred Total
U.S. federal $33,489 $(21,635) $11,854
State and local 7,027 (4,589) 2,438
- ------------------------------------------------------------
$40,516 $(26,224) $14,292
============================================================
Deferred income tax expense results from timing differences in the recognition
of income and expense for income tax and financial reporting purposes. Deferred
income tax balances reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and
income tax purposes. The deferred tax asset primarily reflects the impact of
future tax deductions related to the Company's accruals. Management believes
that, based upon its history of profitable operations, it is probable that its
deferred tax assets will be realized, primarily from the generation of future
taxable income. The deferred tax liability is primarily attributable to the
basis differences related to intangible assets. The Company records its deferred
tax items based on the estimated ultimate value of the tax basis. In 2002, the
Company adopted SFAS 142 which eliminated the requirement to record in the
financial statements amortization expense related to goodwill and intangible
assets with indefinite lives. The Company is able to continue to amortize the
intangible assets for tax purposes which yields an annual tax benefit of
approximately $50 million. Accounting standards require that the Company
recognize deferred taxes relating to the differences between the financial
reporting and tax basis of the assets. As the annual tax benefit from the
amortization expense is realized, the deferred tax liability increases
reflecting the declining tax basis compared to the non-amortized book basis.
Significant components of the Company's deferred tax balances are as follows:
(In thousands) 2003 2002
- -----------------------------------------------------------------
Deferred tax assets (liabilities):
Current:
Prepaid expenses and other $(8,900) $(4,500)
Receivables allowances 10,300 11,400
Accrued insurance and
related expenses 11,400 16,800
Other accrued expenses 73,700 92,500
- -----------------------------------------------------------------
Total current asset 86,500 116,200
=================================================================
Long-Term:
Long-term assets (1) (257,600) (302,700)
Insurance expenses 21,000 26,800
Other long-term obligations (39,400) (36,600)
- -----------------------------------------------------------------
Total long-term liability (276,000) (312,500)
=================================================================
Net deferred tax liability $(189,500) $(196,300)
=================================================================
(1) The deferred tax liability relates primarily to the difference in the tax
versus book basis of intangible assets as well as related tax reserves. The
majority of this liability does not represent expected future cash payments
until a business unit of the Company is sold.
At December 31, 2003, the Company had tax effected federal net operating loss
carryforwards of approximately $26 million, expiring at various dates up to
2023. The Company also had tax credit carryforwards of $4 million which expire
at various dates up to 2023 and tax effected federal capital loss carryforwards
of $1 million, expiring in 2007.
In 2003, the Company received net tax refunds of $1 million. Total net tax
payments in 2002 were $27 million, while in 2001, the Company received net tax
refunds of $1 million.
In the ordinary course, the Company is subject to review by domestic and foreign
taxing authorities, including the Internal Revenue Service ("IRS"). From 1986
through 1997 most operations of the Company were conducted in partnership form,
free of federal corporate income tax. During that period, the Company was not
reviewed by the IRS. In 1997 the Company converted from partnership to corporate
form. In 2003, the IRS notified the Company that it will examine the Company's
consolidated income tax returns for 2002, 2001 and 2000. The Company expects the
IRS to complete its examination in 2005. As with any review of this nature, the
outcome of the IRS examination is not known at this time. The Company believes
it has recorded the appropriate tax provision, tax liabilities and deferred tax
balances.
ACQUISITIONS
Acquisitions have been accounted for using the purchase method and, accordingly,
the results of operations of the acquired businesses have been included in the
Company's consolidated financial statements since their dates of acquisition.
The assets and liabilities of these businesses were
25
<PAGE>
recorded in the financial statements at their estimated fair values as of the
acquisition dates.
CURRENT YEAR
During 2003, the Company acquired several small companies, primarily in the lawn
care business. The purchase price of these acquisitions was $45 million. The
Company recorded goodwill of $38 million and other intangible assets of $4
million related to these acquisitions. The impact of these acquisitions was not
material to the Company's Consolidated Financial Statements.
PRIOR YEARS
During 2002, the Company acquired several small companies, primarily in the pest
control and lawn care businesses. The purchase price of these acquisitions was
$19 million. The Company recorded goodwill of $12 million and other intangible
assets of $4 million related to these acquisitions.
In January 2001, the Company acquired the Allied Bruce Terminix Companies, the
largest Terminix franchise and the fourth largest pest control company in the
United States. The total consideration consisted of an equity interest in the
Terminix subsidiary valued at $100 million, which is convertible into eight
million ServiceMaster common shares, and longer-term cash payments due over nine
years totaling $25 million. Approximately $122 million of goodwill was recorded
related to this acquisition.
During 2001, the Company acquired several small companies, primarily in the pest
control and heating/air conditioning and plumbing businesses. The purchase price
net of assumed liabilities of these acquisitions was $64 million. All of these
companies were acquired before June 30, 2001 (the date that SFAS 141 became
effective). Approximately $56 million of goodwill was recorded relating to these
acquisitions.
In October 2001, the Company acquired certain assets of Sears Termite and Pest
Control, Inc., a company that provides pest control services and protection
against termite damage to residential customers located primarily in the
Southeast. The cash paid after assuming the liabilities to remediate the
premises owned by current customers was not material. Approximately $54 million
was recorded as goodwill and $6 million assigned to other intangible assets
which will be amortized over three to seven years.
Supplemental cash flow information regarding the Company's acquisitions is as
follows:
(in thousands) 2003 2002 2001
==================================================================
Purchase price $44,667 $18,850 $245,646
Less liabilities
assumed (6,315) (1,207) (54,790)
- ------------------------------------------------------------------
Net purchase price $38,352 $17,643 $190,856
==================================================================
Net cash paid
for acquisitions $28,875 $13,003 $55,842
Seller financed debt 9,477 4,640 35,014
Minority ownership
in Terminix - - 100,000
- ------------------------------------------------------------------
Payment for
acquisitions $38,352 $17,643 $190,856
==================================================================
DISPOSITIONS
During the third quarter of 2003, the Company sold substantially all of the
assets and related operational obligations of Trees, Inc., the utility line
clearing operations of TruGreen LandCare, to an independent subsidiary of
Asplundh Subsidiary Holdings, Inc., for approximately $20 million in cash. The
impact of the sale was not material to the Company's consolidated financial
statements for 2003.
2002 DISPOSITIONS
During the second quarter of 2002, the Company completed the sale of its
ownership interest in five assisted living facilities. These properties were
financed through an operating lease arrangement, whereby, the Company guaranteed
a portion of the residual value of the properties. In the fourth quarter of
2001, a $13.5 million reserve was established representing the amount by which
the residual value guarantees exceeded the value of bids to purchase the
facilities at that time. The final sales price was significantly greater than
these bid levels and the Company realized a gain of $3.6 million from the sale
of the assisted living properties in 2002, which is included in operating
income.
During the third quarter of 2002, the Company sold its remaining Terminix
operations in the United Kingdom. The sale was not material to the Company's
operating results. Related to this sale, the Company entered into a licensing
agreement with the buyer for the use of the Terminix trade name in the United
Kingdom. This agreement was valued at $6 million and accordingly, a like amount
was allocated from the purchase price. The entire amount was recognized as
income in the third quarter of 2002.
PORTFOLIO REVIEW AND DISPOSITIONS IN 2001
In October 2001, the Company's Board of Directors approved a series of strategic
actions which were the culmination of an extensive portfolio review process that
was initiated earlier in 2001. In the fourth quarter of 2001, the Company sold
its Management Services business to ARAMARK Corporation for approximately $800
million and recorded an after-tax gain of $404 million. (A division of
Management Services was not sold as part of this transaction and the Company
recorded a $15 million loss upon disposition of this unit.) Also in the fourth
quarter of 2001, the Company's Board of Directors approved the exit of
non-strategic and under-performing businesses including TruGreen LandCare
Construction, Certified Systems Inc. (CSI), and certain Terminix operations in
Europe. The Company sold its TruGreen LandCare Construction operations in
certain markets to Environmental Industries, Inc. (EII) and EII managed the
wind-down of commercial landscaping construction contracts in the remaining
markets. In addition, the Company sold all of its customer contracts relating to
the exit of CSI (the Company's professional employer organization) to AMS Staff
Leasing, N.A., Inc. In the fourth quarter of 2001, the Company sold certain
subsidiaries of its European pest control and property services operations.
In the fourth quarter of 2002, the purchaser of the Company's European pest
control and property services operations made a claim for a purchase price
adjustment (relating to the 2001 sale), relating to an alleged breach of certain
conditions in the purchase agreement. In the course of responding to that claim,
26
<PAGE>
the Company discovered that personnel of the former operations had made
unsupported monthly adjustments to certain accounts. The Company subsequently
agreed to an adjustment to the purchase price consisting of an $8 million cash
payment and the cancellation of a previously reserved note receivable of $7
million. An $8 million charge was recorded in 2002.
Reported "Discontinued operations" for all periods presented include the
operating results of the sold and discontinued businesses noted above and the
2001 results include the gain from the sale of Management Services, net of
losses from the disposition of other entities. The operating results and
financial position of discontinued operations are as follows:
(in thousands, except per share data)
Operating Results: 2003 2002 2001
=================================================================
Operating revenue $65,057 $129,060 $2,356,010
Income (loss) from
discontinued
operations before
income taxes (3,482) 7,543 (20,009)
Provision (benefit) for
income taxes (1,375) 3,012 14,601
- -----------------------------------------------------------------
Income (loss) from
discontinued
operations (2,107) 4,531 (34,610)
Gain (loss) on sale of
businesses, net (1) (605) (4,840) 323,213
=================================================================
Income (loss) from
discontinued
operations $(2,712) $(309) $288,603
=================================================================
Diluted earnings
per share from
discontinued
operations $(0.01) $ - $0.97
=================================================================
(1) Net of income tax expense (benefit) of ($.4) million, ($3) million, and
$218 million in 2003, 2002 and 2001, respectively.
Financial Position: 2003 2002
=================================================================
Current assets $5,273 $15,883
Property, plant and equipment - 6,703
- -----------------------------------------------------------------
Total assets $5,273 $22,586
- -----------------------------------------------------------------
Current liabilities $14,380 $36,624
Long-term liabilities 34,396 30,682
- -----------------------------------------------------------------
Total liabilities $48,776 $67,306
=================================================================
At December 31, 2003, the Company has certain assets on its financial statements
relating to discontinued operations, primarily receivables. Management is
actively collecting the outstanding receivables. The Company believes that the
remaining assets are presented at their net realizable value. The table below
summarizes the activity during the twelve months ended December 31, 2003 for the
remaining liabilities from the discontinued operations. The Company believes
that the remaining reserves continue to be adequate and reasonable.
Balance at Cash Balance at
Dec. 31, Payments Income/ Dec. 31,
(in thousands) 2002 or Other (Expense) 2003
- --------------------------------------------------------------------------------
Remaining liabilities
from discontinued
operations
LandCare Construction $13,974 $6,822 $ - $7,152
LandCare utility line
clearing business (1) 6,393 185 (2,803) 9,011
Certified Systems, Inc. 13,586 2,562 - 11,024
Management Services 1,569 1,286 - 283
International businesses 21,348 10,331 (1,000) 12,017
Other 10,436 1,147 - 9,289
(1) In September 2003, the Company sold the assets and related operational
obligations of Trees, Inc., the utility line clearing operations of TruGreen
LandCare. The Company retained certain liabilities and recorded accruals in
connection with the sold operations.
2001 CHARGE
In the fourth quarter of 2001, the Company recorded a pre-tax charge primarily
related to goodwill and asset impairments and other items totaling $345 million.
At the end of 2001, there were approximately $36 million of reserves and
accruals relating to severance, losses on residual value guarantees, and other
claims. Throughout 2002 approximately $15 million was paid relating to these
reserves. There was $5.6 million recorded as reduced expense in 2002 relating to
the favorable settlement of several items. In 2003 there were payments of $3.5
million relating to these items and $1.3 million of favorable resolution. The
ending reserve balance is approximately $10.5 million and relates primarily to
long-term severance agreements that extend over several years. (Unrelated to
these reserves, the Company also recorded a $3.2 million charge in 2002 relating
to the retirement of a key executive. This severance will be paid out over three
years.)
COMMITMENTS AND CONTINGENCIES
The Company carries insurance policies on insurable risks at levels which it
believes to be appropriate, including workers' compensation, auto and general
liability risks. The Company has self-insured retention limits and insured
layers of excess insurance coverage above such self-insured retention limits.
Accruals for self-insurance losses and warranty claims in the American Home
Shield business are made based on the Company's claims experience and actuarial
assumptions. The Company has certain liabilities with respect to existing or
potential claims, lawsuits, and other proceedings. The Company accrues for these
liabilities when it is probable that future costs will be incurred and such
costs can be reasonably estimated.
In the ordinary course of conducting its business activities, the Company
becomes involved in judicial, administrative and regulatory proceedings
involving both private parties and governmental authorities. These proceedings
include general and commercial liability actions and a small number of
environmental proceedings. The Company does not expect any of these proceedings
to have a material adverse effect on its Consolidated Financial Statements.
EMPLOYEE BENEFIT PLANS
Discretionary contributions to qualified profit sharing and non-qualified
deferred compensation plans were made in the amount of $4.5 million in 2003,
$9.2 million in 2002 and $8.9 million in 2001. Under the Employee Share Purchase
Plan, the Company
27
<PAGE>
contributed $.8 million in 2003, $.9 million in 2002 and $.8 million in 2001.
These funds defrayed part of the cost of the shares purchased by employees.
MINORITY INTEREST OWNERSHIP AND RELATED PARTIES
The Company continues to have minority investors in Terminix. This minority
ownership reflects an interest issued to the prior owners of the Allied Bruce
Terminix Companies in connection with that acquisition. Their related equity
security is exchangeable into eight million ServiceMaster common shares. The
ServiceMaster shares are included in the shares used in the calculation of
diluted earnings per share.
Kleiner Perkins Caufield & Byers (KP) purchased a minority interest in
ServiceMaster New Channels Development (SMNCD) (formerly known as the
ServiceMaster Home Service Center) in January 2000 for $15 million and exercised
an option to purchase an additional $5 million in January 2001. In May 2000,
certain members of ServiceMaster management purchased a minority interest in
SMNCD for approximately $1 million. The Company had allocated losses in SMNCD to
KP's minority interest in 2000 and 2001 based on its relative priority in
liquidation until such interest was reduced to zero in 2001. In December 2001,
the Company acquired, at fair value, the minority interest SMNCD held by KP. The
entire purchase price of $20 million was allocated to goodwill. The Company also
purchased management's ownership in SMNCD for approximately $1 million.
Also in 2001, and in connection with the sale and disposition of the TruGreen
LandCare construction operations, the Company repurchased at fair value the
shares of TruGreen that were previously purchased by management earlier in the
year. The purchase and sales prices of the shares were at identical amounts of
$12 million, which was charged to the minority interest liability.
In January 2001, Jonathan P. Ward, President and Chief Executive Officer of
ServiceMaster, purchased from ServiceMaster a 5.50 percent convertible debenture
due January 9, 2011, with a face value of $1.1 million. The Company loaned Mr.
Ward the entire amount of the purchase price through a 5.50 percent full
recourse loan due January 9, 2011. In May 2001, Mr. Ward purchased a second 5.50
percent convertible debenture due May 10, 2011, with a face value of $1.1
million. The Company loaned 50 percent of the purchase price of this second
debenture with a 5.50 percent full recourse loan due May 10, 2011. In October
2003, the Company redeemed and cancelled the two convertible debentures issued
to Mr. Ward. Mr. Ward repaid the January 9, 2001 and May 10, 2001 loans in full.
The impact of the settlement was less than $100 thousand and was not material to
the Consolidated Financial Statements.
The Company has partially guaranteed a loan by a third party bank to an employee
totaling $13.7 million, which is fully secured as of December 31, 2003 and 2002
by employee owned shares of the Company. Payments by the Company related to this
note are not expected.
LONG-TERM DEBT
Long-term debt includes the following:
(In thousands) 2003 2002
================================================================
8.45% maturing in 2005 $137,499 $137,499
6.95% maturing in 2007 49,225 49,225
7.88% maturing in 2009 179,000 179,000
7.10% maturing in 2018 79,473 79,473
7.45% maturing in 2027 195,000 195,000
7.25% maturing in 2038 82,650 82,650
Other 96,424 112,628
Less current portion (33,781) (31,135)
- ----------------------------------------------------------------
Total long-term debt $785,490 $804,340
================================================================
The Company is party to a number of debt agreements which require it to maintain
certain financial and other covenants, including limitations on indebtedness
(debt cannot exceed 3.25 times earnings before interest, taxes, depreciation,
and amortization (EBITDA)) and a minimum interest coverage ratio (EBITDA needs
to exceed four times interest expense). In addition, under certain
circumstances, the agreements may limit the Company's ability to pay dividends
and repurchase shares of common stock. These limitations are not expected to be
a factor in the Company's future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result in the acceleration of the
maturity of the debt. At December 31, 2003, the Company was in compliance with
the covenants related to these debt agreements and based on its operating
outlook for 2004, expects to be able to maintain compliance in the future.
The Company does not have any debt agreements that contain put rights or provide
for acceleration of maturity as a result of a change in credit rating. However,
the Company has a number of debt agreements which contain standard ratings-based
"pricing grids" where the interest rate payable under the agreement changes as
the Company's credit rating changes. While the Company does not expect a
negative change in credit ratings, the impact on interest expense resulting from
any changes in credit ratings is not expected to be material to the Company.
Since August 1997, ServiceMaster has issued $1.1 billion of unsecured debt
securities pursuant to registration statements filed with the Securities and
Exchange Commission. As of December 31, 2003, ServiceMaster had $550 million of
senior unsecured debt securities and equity interests available for issuance
under an effective shelf registration statement.
In the second quarter of 2002, the Company recorded a loss on early
extinguishment of debt of $15.4 million pre-tax ($9.2 million after-tax, or $.03
per diluted share), resulting from the repurchase of a portion of its publicly
traded debt. Additionally, the Company recorded a pre-tax loss on early
extinguishment of debt of $16.0 million ($9.4 million after-tax, or $.03 per
diluted share) in the fourth quarter of 2001, and a pre-tax gain on early
extinguishment of debt of $10.2 million ($6.0 million after-tax, or $.02 per
diluted share) in the first quarter of 2001. In accordance with SFAS 145, these
gain/losses were reclassified from an extraordinary item into continuing
operations as interest expense in the accompanying Consolidated Statements of
Operations. See the "Newly Adopted Accounting
28
<PAGE>
Principles" section in the Notes to Consolidated Financial Statements.
The Company has a committed revolving bank credit facility for up to $490
million that expires in December 2004. The Company expects to replace this
facility prior to maturity. The facility can be used for general Company
purposes. As of December 31, 2003, the Company had issued approximately $153
million of letters of credit under the facility and had unused commitments of
approximately $337 million. At the Company's current credit ratings, the
interest rate under the facility is LIBOR plus 125 to 150 basis points depending
upon usage.
As of December 31, 2003, the Company had approximately $5 million of annually
renewable surety bonds outstanding that primarily support obligations the
Company has under insurance programs. If the surety bonds are not renewed, the
Company expects to replace them with letters of credit issued under its bank
credit facility.
In December 2003 and January 2004, the Company entered into interest rate swap
agreements with a total notional amount of $165 million. Under the terms of
these agreements, the Company pays a floating rate of interest (based on a
specified spread over six-month LIBOR) on the notional amount and the Company
receives a fixed rate of interest at 7.88% on the notional amount. The impact of
these swap transactions was to convert $165 million of the Company's debt from
fixed rate at 7.88% to a variable rate based on LIBOR. In accordance with SFAS
133 "Accounting for Derivative Instruments and Hedging Activities", the
Company's interest rate swap agreements are classified as fair value hedges and,
as such, gains and losses on the swaps as well as the gains and losses on the
related hedged items are recognized in current earnings.
Cash interest payments were $61 million in 2003, $76 million in 2002 and $128
million in 2001. Average rates paid on the revolving credit facility were 5.0
percent in 2001. There were no material borrowings under the facility in 2002
and 2003. Future scheduled long-term debt payments are $33.8 million in 2004
(average rate of 4.4 percent), $150.6 million in 2005 (average rate of 8.3
percent), $12.1 million in 2006 (average rate of 6.0 percent), $60.0 million in
2007 (average rate of 6.7 percent) and $22.8 million in 2008 (average rate of
3.7 percent).
The Company leases certain property and equipment under various operating lease
arrangements. Most of the property leases provide that the Company pay taxes,
insurance and maintenance applicable to the leased premises. As leases for
existing locations expire, the Company expects to renew the leases or substitute
another location and lease.
The majority of the Company's fleet and some equipment are leased through
operating leases. Lease terms are non-cancelable for the first 12 month term and
then are month-to-month leases, cancelable at the Company's option. There are
residual value guarantees (ranging from 70 percent to 87 percent depending on
the agreement) on these vehicles and equipment, which historically have not
resulted in significant net payments to the lessors. There are no net payments
reflected in the future minimum lease obligation as the leases are cancelable
and there are no expected net payments due under the guarantees. At December 31,
2003 there was approximately $241 million of residual value relating to the
Company's fleet and equipment leases.
Rental expense for 2003, 2002 and 2001 was $160 million, $153 million and $154
million, respectively. Future long-term non-cancelable operating lease payments
are $72.0 million in 2004, $61.4 million in 2005, $51.0 million in 2006, $37.9
million in 2007, $25.0 million in 2008 and $43.0 million thereafter.
The Company maintains operating lease facilities with banks totaling $95 million
which provide for the acquisition and development of properties to be leased by
the Company. The Company has guaranteed the residual value of the properties
under the leases up to 82 percent of the fair market value at the commencement
of the lease. At December 31, 2003, approximately $73 million was funded under
these facilities. Approximately $20 million and $15 million of these leases have
been recorded on the balance sheet as capital leases with related assets and
debt recorded as of December 31, 2003 and December 31, 2002, respectively. Of
the $95 million in facilities, $80 million expires in October 2004 and $15
million expires in January 2008. If the Company does not renew the facility that
expires in October 2004, it may be required to purchase the leased assets which
total approximately $53 million.
CASH AND MARKETABLE SECURITIES
Cash, money market funds and certificates of deposits, with maturities of three
months or less, are included in the Statements of Financial Position caption
"Cash and Cash Equivalents." Marketable securities are designated as available
for sale and recorded at current market value, with unrealized gains and losses
reported in a separate component of shareholders' equity. As of December 31,
2003 and 2002, the Company's investments consist primarily of domestic publicly
traded debt of $89.1 million and $73.6 million, respectively and common equity
securities of $94.0 million and $56.0 million, respectively.
The aggregate market value of the Company's short- and long-term investments in
debt and equity securities was $183.1 million and $129.6 million and the
aggregate cost basis was $173.2 million and $132.0 million at December 31, 2003
and 2002, respectively.
Interest and dividend income received on cash and marketable securities was $8.4
million, $10.6 million, and $9.7 million, in 2003, 2002, and 2001, respectively.
Gains and losses on sales of investments, as determined on a specific
identification basis, are included in investment income in the period they are
realized. The Company periodically reviews its portfolio of investments to
determine whether there has been an other than temporary decline in the value of
the investments from factors such as deterioration in the financial condition of
the issuer or the market(s) in which it competes. At December 31, 2003, the
unrealized gains in the investment portfolio totaled $10 million, while the
unrealized losses in the aggregate were immaterial and totaled less than $.7
million and the portion of unrealized losses older than one year was less than
$.2 million.
29
<PAGE>
RECEIVABLE SALES
The Company has an agreement to provide for the ongoing revolving sale of a
designated pool of accounts receivable of TruGreen and Terminix to a
wholly-owned, bankruptcy-remote subsidiary, ServiceMaster Funding LLC.
ServiceMaster Funding LLC has entered into an agreement to transfer, on a
revolving basis, an undivided percentage ownership interest in a pool of
accounts receivable to unrelated third party purchasers. ServiceMaster Funding
LLC retains an undivided percentage interest in the pool of accounts receivable
and bad debt losses for the entire pool are allocated first to this retained
interest. The Company recorded a $3 million pre-tax loss in 2001 related to this
program which was recorded in minority interest and other expense. At December
31, 2003, there were no receivables sold to third parties under this agreement.
However, the Company may sell its receivables in the future which would provide
an alternative funding source. The agreement is a 364-day facility that is
renewable at the option of the purchasers. The Company may sell up to $65
million of its receivables to these purchasers in the future and therefore has
immediate access to cash proceeds from these sales. The amount of the eligible
receivables varies during the year based on seasonality of the business and will
at times limit the amount available to the Company.
COMPREHENSIVE INCOME
Comprehensive income, which encompasses net income, unrealized gains on
marketable securities, and the effect of foreign currency translation is
disclosed in the Statement of Shareholders' Equity.
OTHER COMPREHENSIVE INCOME
(In thousands) 2003 2002 2001
- -------------------------------------------------------------
Unrealized holding
gains (losses)
arising in period $15,559 $(7,941) $(3,601)
Tax expense 6,224 (3,196) (2,382)
- ------------------------------------------------------------
Net of tax amount $9,335 $(4,745) $(1,219)
============================================================
Gains (losses) realized $3,855 $(1,460) $3,845
Tax expense 1,542 (584) 705
- ------------------------------------------------------------
Net of tax amount $2,313 $(876) $3,140
============================================================
Accumulated comprehensive income included the following components as of
December 31:
(In thousands) 2003 2002 2001
- ------------------------------------------------------------
Unrealized gains
(losses) on securities $5,986 $(1,036) $2,833
Foreign currency
translation 1,946 187 (5,329)
- ------------------------------------------------------------
Total $7,932 $(849) $(2,496)
============================================================
SHAREHOLDERS' EQUITY
The Company has authorized one billion shares of common stock with par value of
$.01 and 11 million shares of preferred stock. There were no shares of preferred
stock issued or outstanding. The Company records its dividend liability in the
consolidated financial statements on the record date. As of December 31, 2003,
the Company had declared a cash dividend of $.105 per share to shareholders of
record on January 9, 2004. In March 2004, the Company declared a cash dividend
of $.105 per share to shareholders of record on April 9, 2004.
The Company has an effective shelf registration statement to issue shares of
common stock in connection with future, unidentified acquisitions. This
registration statement allows the Company to issue registered shares much more
efficiently when acquiring privately held companies. The Company plans to use
the shares over time in connection with purchases of small acquisitions. There
were approximately 4.7 million shares available for issuance under this
registration statement at December 31, 2003.
As of December 31, 2003, there were 44.9 million Company shares available for
issuance upon the exercise of employee stock options outstanding and future
grants. Stock options are issued at a price not less than the fair market value
on the grant date and expire within ten years of the grant date. Certain options
may permit the holder to pay the option exercise price by tendering Company
shares that have been owned by the holder without restriction for an extended
period. Share grants and restricted stock awards carry a vesting period and are
restricted as to the sale or transfer of the shares. Shares of restricted stock
are non-transferable and subject to forfeiture if the holder does not remain
continuously employed by the Company during the vesting period, or if the
restricted stock is subject to performance measures, if those performance
measures are not attained. A holder of a restricted stock award has rights as a
shareholder of the Company and the Company includes the vested and unvested
portions of the restricted stock awards in shares outstanding in the denominator
of its earnings per share calculations.
Beginning in 2003, the Company is accounting for employee stock options as
compensation expense in accordance with SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123", provides alternative
methods of transitioning to the fair-value based method of accounting for
employee stock options as compensation expense. The Company is using the
"prospective method" permitted under SFAS 148 and is expensing the fair value of
new employee option grants awarded subsequent to 2002.
Prior to 2003, the Company accounted for employee share options under the
intrinsic method of Accounting Principles Board Opinion 25, as permitted under
GAAP. Accordingly, no compensation cost had been recognized in the accompanying
financial statements in 2002 and 2001 related to these options. See the
"Stock-Based Compensation" note in the "Significant Accounting Policies" section
for the proforma net income and earnings per share under the fair-value based
method of SFAS 123. In computing this proforma impact, the fair value of each
option is estimated on the date of grant based on the Black-Scholes option
pricing model with the following weighted-average assumptions in 2003, 2002 and
2001: risk-free interest rates of 3.6 percent, 4.5 percent and 4.8 percent,
respectively; dividend yields of 4.2 percent 3.2 percent and 3.7 percent,
respectively; and average expected lives of six to seven years. The options
granted to employees in 2003, 2002 and 2001 have weighted-average fair values of
$2.14, $3.51 and $2.41, respectively and vest ratably over five years. The
Company has estimated the value of these options assuming a single
weighted-average expected life for the entire award.
30
<PAGE>
Options and grant transactions during the last three years are summarized below:
<TABLE>
Stock Price Weighted Avg. Share Grants/ Price
Options Range (1) Exercise Price Restricted Range
Stock
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Total exercisable, December 31, 2000 12,208,351 $2.25 - 87.55 $12.37 - -
Total outstanding, December 31, 2000 26,515,329 $2.25 - 87.55 $12.84 482,356 $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2001
Granted to employees 5,184,141 $9.10 - 12.52 $10.63 - -
Exercised or vested (864,418) $2.25 - 11.41 $6.52 (171,518) $2.86 - 7.96
Terminated or resigned (1,503,167) $2.25 - 87.55 $17.27 (210,319) $2.86 - 7.96
- --------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2001 15,237,607 $2.25 - 77.56 $12.36 - -
Total outstanding, December 31, 2001 29,331,885 $2.25 - 77.56 $12.40 100,519 $2.86 - 7.96
================================================================================================================================
TRANSACTIONS DURING 2002
Granted to employees 4,939,141 $9.09 - 15.10 $13.08 179,000 $10.51-13.80
Exercised or vested (1,586,248) $2.25 - 14.55 $7.60 (46,632) $2.86 - 7.96
Terminated or resigned (871,439) $5.14 - 73.53 $16.37 - -
- --------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2002 18,089,830 $2.25 - 77.56 $13.05 - -
Total outstanding, December 31, 2002 31,813,339 $2.25 - 77.56 $12.64 232,887 $2.86 - 13.80
================================================================================================================================
TRANSACTIONS DURING 2003
Granted to employees 2,432,674 $8.40 - 11.21 $9.91 364,419 $9.50 - 11.97
Exercised or vested (1,296,101) $6.44 - 11.50 $7.70 (56,092) $2.86 - 13.80
Terminated or resigned (1,240,146) $2.25 - 37.40 $13.49 (3,514) $9.95
- --------------------------------------------------------------------------------------------------------------------------------
Total exercisable, December 31, 2003 20,346,581 $6.44 - 77.56 $13.16 - -
Total outstanding, December 31, 2003 31,709,766 $6.44 - 77.56 $12.60 537,700 $3.03 - 13.80
================================================================================================================================
</TABLE>
(1) The options priced at $73.53 to $87.55 are options assumed by the Company
as a result of business acquisitions.
Options outstanding at December 31, 2003:
<TABLE>
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/03 Life Exercise Price at 12/31/03 Exercise Price
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
$6.44 - 10.78 13,366,166 4.0 Years $9.63 7,407,729 $9.38
$10.80 - 15.94 12,072,574 5.0 Years $12.26 7,279,233 $11.88
$16.12 - 22.33 5,919,582 5.0 Years $18.18 5,308,175 $18.19
$27.20 - 77.56 351,444 3.0 Years $43.09 351,444 $43.09
- ------------------------------------------------------------------------------------------------------------------------------------
$6.44 - 77.56 31,709,766 5.0 Years $12.60 20,346,581 $13.16
====================================================================================================================================
</TABLE>
31
<PAGE>
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of shares outstanding for the
period. The weighted average common shares for the diluted earnings per share
calculation includes the incremental effect related to outstanding options whose
market price is in excess of the exercise price. Shares potentially issuable
under convertible securities have been considered outstanding for purposes of
the diluted earnings per share calculations. In computing diluted earnings per
share, the after-tax interest expense related to convertible debentures is added
back to net income in the numerator, while the diluted shares in the denominator
include the shares issuable upon conversion of the debentures. Due to the losses
incurred in 2003 and 2001, the denominator does not include the effects of
options as it would result in a less dilutive computation. As a result, diluted
earnings per share are the same as basic earnings per share. Had the Company
recognized income from continuing operations in 2003 and 2001, incremental
shares attributable to the assumed exercise of outstanding options would have
increased diluted shares outstanding by 3.9 million and 4.6 million shares,
respectively. Shares potentially issuable under convertible securities have not
been considered outstanding for all periods presented as their inclusion results
in a less dilutive computation. Had the inclusion of convertible securities not
resulted in a less dilutive computation in 2002, incremental shares attributable
to the assumed conversion of the debentures would have increased shares
outstanding by 8.2 million shares and the after-tax interest expense related to
the convertible debentures that would have been added to net income in the
numerator would have been $4.8 million.
The following table reconciles both the numerator and the denominator of the
basic earnings per share from continuing operations computation to the numerator
and the denominator of the diluted earnings per share from continuing operations
computation.
<TABLE>
(In thousands, except per
share data)
FOR YEAR ENDED 2003 For year ended 2002 For year ended 2001
CONTINUING OPERATIONS: LOSS SHARES EPS Income Shares EPS Loss Shares EPS
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $(221,975) 295,610 $(0.75) $157,303 300,383 $0.52 $(172,219) 298,659 $(0.58)
Effect of Dilutive Securities:
Options - 5,529 -
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS $(221,975) 295,610 $(0.75) $157,303 305,912 $0.51 $(172,219) 298,659 $(0.58)
===================================================================================================================================
</TABLE>
32
<PAGE>
QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results and related growth for the last three years in
revenues, gross profit, income from continuing operations, income from
discontinued operations and earnings per share are shown in the table below. As
discussed in the "Interim Reporting" section in the Significant Accounting
Policies, for interim accounting purposes, TruGreen ChemLawn incurs pre-season
advertising costs and annual repair and maintenance procedures that are
performed in the first quarter. These costs are deferred and recognized as
expense in proportion to the related revenues. Full year results are not
affected. In the fourth quarter of 2003, the Company corrected its historical
method of recognizing renewal revenue from certain Terminix and American Home
Shield customers who have prepaid. This adjustment reduced operating and pre-tax
income by $12 million, or $.02 per share in the fourth quarter of 2003.
<TABLE>
(in thousands, except per share data)
2003 Chg 2002 (1) Chg 2001 (1)
==================================================================================================================================
CONTINUING OPERATIONS:
Operating Revenue:
<S> <C> <C> <C> <C> <C>
First Quarter $712,343 0% $711,956 1% $702,445
Second Quarter 1,031,470 2 1,013,777 1 998,830
Third Quarter 1,018,263 3 987,757 3 959,438
Fourth Quarter 806,510 2 787,231 (4) 816,098
==================================================================================================================================
$3,568,586 2% $3,500,721 1% $3,476,811
==================================================================================================================================
Gross Profit:
First Quarter $195,989 (2%) $200,944 5% $190,764
Second Quarter 373,587 6 353,543 5 337,093
Third Quarter 347,942 8 323,111 5 307,460
Fourth Quarter 220,545 (2) 224,171 (6) 238,297
==================================================================================================================================
$1,138,063 3% $1,101,769 3% $1,073,614
==================================================================================================================================
Income (Loss) from Continuing Operations:
First Quarter $4,843 (53%) $10,377 79% $5,784
Second Quarter 66,329 8 61,625 27 48,596
Third Quarter (316,526) N/M 66,015 50 43,945
Fourth Quarter 23,379 21 19,286 N/M (270,544)
==================================================================================================================================
$(221,975) N/M $157,303 N/M ($172,219)
==================================================================================================================================
Basic Earnings (Loss) Per Share:
First Quarter $0.02 (33%) $0.03 50% $0.02
Second Quarter 0.22 10 0.20 25 0.16
Third Quarter (1.08) N/M 0.22 47 0.15
Fourth Quarter 0.08 33 0.06 N/M (0.90)
==================================================================================================================================
$(0.75) N/M $0.52 N/M ($0.58)
==================================================================================================================================
Diluted Earnings (Loss) Per Share:
First Quarter $0.02 (33%) $0.03 50% $0.02
Second Quarter 0.22 10 0.20 25 0.16
Third Quarter (1.08) N/M 0.21 50 0.14
Fourth Quarter 0.08 33 0.06 N/M (0.90)
==================================================================================================================================
$(0.75) N/M $0.51 N/M $(0.58)
==================================================================================================================================
DISCONTINUED OPERATIONS:
Income (Loss) from Discontinued Operations:
First Quarter ($168) N/M $1,264 (80%) $6,211
Second Quarter (779) N/M 878 (84) 5,364
Third Quarter (1,440) N/M 2,068 (76) 8,587
Fourth Quarter (325) N/M (4,519) N/M 268,441
==================================================================================================================================
$(2,712) N/M ($309) N/M $288,603
==================================================================================================================================
Diluted Earnings (Loss) Per Share:
First Quarter $ - -% $ - (100%) $0.02
Second Quarter - -% - (100) 0.02
Third Quarter - (100) 0.01 (67) 0.03
Fourth Quarter - 100 (0.01) N/M 0.90
==================================================================================================================================
$(0.01) (100%) $ - (100%) $0.97
==================================================================================================================================
N/M = Not meaningful
</TABLE>
(1) During the third quarter of 2003, the Company sold its utility line
clearing operations of its TruGreen LandCare business. The financial
results from these operations have been reclassified from "Continuing
Operations" to "Discontinued Operations" for all periods presented.
33
<PAGE>
INDEPENDENT AUDITORS
On May 20, 2002, ServiceMaster, with the approval of the Board of Directors and
the Audit and Finance Committee, dismissed Arthur Andersen LLP as its
independent auditors and engaged Deloitte & Touche LLP as its new independent
auditors. The appointment of Deloitte & Touche became effective on May 22, 2002.
During the two fiscal years ended December 31, 2001 and 2000, and the interim
period subsequent to December 31, 2001, and through May 20, 2002, there were no
disagreements between ServiceMaster and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to Arthur Andersen's satisfaction,
would have caused Arthur Andersen to make reference to the subject matter in
connection with its reports on ServiceMaster's consolidated financial statements
for such periods. Arthur Andersen's report on ServiceMaster's consolidated
financial statements for the years ended December 31, 2001 and 2000 did not
contain an adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles. During the
years ended December 31, 2001 and 2000, and the interim period from January 1,
2002 through May 20, 2002, there were no reportable events as described under
Item 304(a)(1)(v) of Regulation S-K. During the years ended December 31, 2001
and 2000, and through May 20, 2002, ServiceMaster did not consult with Deloitte
and Touche with respect to the application of accounting principles to a
specified transaction, either completed or proposed, the type of audit opinion
that might be rendered on ServiceMaster's consolidated financial statements, or
any matter that was the subject of a disagreement or a reportable event, as
described in Items 304(a)(2)(i) and (ii) of Regulation S-K.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of The ServiceMaster Company
We have audited the accompanying consolidated statements of financial position
of The ServiceMaster Company and subsidiaries (the "Company") as of December 31,
2003 and 2002, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The ServiceMaster Company and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in the Newly Adopted Accounting Principles note to the consolidated
financial statements, effective January 1, 2003, the Company adopted Statement
of Financial Acoounting Standards ("SFAS") No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL
CORRECTIONS. Also, as discussed in the Goodwill and Intangible Assets note to
the consolidated financial statements, effective January 1, 2002, the Company
adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
Deloitte & Touche LLP
Chicago, Illinois
March 15, 2004
34
<PAGE>
<TABLE>
QUARTERLY CASH DIVIDENDS AND PRICE PER SHARE DATA
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share: % CHG % Chg
<S> <C> <C> <C> <C> <C>
First Quarter $0.105 5% $0.10 0% $0.10
Second Quarter 0.105 5 0.10 0 0.10
Third Quarter 0.105 0 0.105 5 0.10
Fourth Quarter 0.105 0 0.105 5 0.10
- -------------------------------------------------------------------------------------------------------------------------------
$0.42 2% $0.41 3% $0.40
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the quarterly prices of ServiceMaster's common
stock, as reported on the New York Stock Exchange Composite Transactions:
<TABLE>
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Price Per Share: HIGH LOW High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $11.41 $8.95 $14.50 $13.16 $12.00 $9.95
Second Quarter 10.95 8.97 15.50 12.70 12.00 9.84
Third Quarter 10.73 9.35 13.63 10.30 12.84 9.95
Fourth Quarter $12.10 $10.20 $12.15 $8.89 $14.20 $10.06
</TABLE>
35
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-14
<SEQUENCE>13
<FILENAME>exh14.txt
<DESCRIPTION>FINANCIAL CODE OF ETHICS
<TEXT>
EXHIBIT 14
THE SERVICEMASTER COMPANY
FINANCIAL CODE OF ETHICS
(approved by Governance and Nominating Committee on March 4, 2004)
ServiceMaster is committed to maintaining high standards related to our
accounting and reporting processes and internal accounting controls. This
commitment must be supported by the high ethical standards of our financial
employees. This Financial Code of Ethics embodies these principles and has been
approved pursuant to ServiceMaster's Financial Code of Ethics Policy.
While ServiceMaster expects all financial employees to adhere to these
principles, our financial leaders play a key role in ensuring compliance with
these principles. As such, individuals holding the following positions shall
acknowledge in writing his or her responsibility for adherence to the Financial
Code of Ethics:
o Chief Executive Officer
o President
o Chief Financial Officer
o Controller
o Assistant Controller(s)
o Treasurer
o Business Unit President
o Business Unit Chief Financial Officers
o Other key financial or accounting employee as may be designated by the
Chief Executive Officer, President or Chief Financial Officer
- -----------------------------------------------------------------------------
As an employee covered by this Financial Code of Ethics, I will:
o Act with honesty and integrity in my professional relationships. I will
promote and be an example of ethical behavior as a responsible partner
among my peers and subordinates in the work environment;
o Avoid conflicts of interest. In doing so, I will ethically handle any
actual or apparent conflict of interest in personal and professional
relationships and will promptly disclose to the ServiceMaster General
Counsel the nature of any transaction or relationship that reasonably
could be expected to give rise to such a conflict of interest;
o Provide full, fair, accurate, timely and understandable financial
disclosures in documents filed with, or submitted to, the Securities
and Exchange Commission, any other government agency or self-regulatory
organization, or used in other public communications. Any accounting
records for which I am responsible that underlie the financial
statements included in these disclosures will be prepared in accordance
with generally accepted accounting principles applied consistently with
the principles used to prepare the audited financial statements;
<PAGE>
o Comply with applicable laws, rules and regulations of federal, state,
provincial and local governments, the Securities and Exchange
Commission, the New York Stock Exchange, and other applicable private
and public regulatory agencies;
o Act in good faith, responsibly, with due care, competence and
diligence, and without misstating, misrepresenting or omitting material
facts or circumstances or allowing my independent judgment to be
subordinated;
o Maintain the confidentiality of information acquired in the course of
my work, except where disclosure is authorized and appropriate to carry
out my assigned responsibilities, or where I am otherwise legally
obligated to disclose such information. I will not use confidential
information acquired in the course of my work for personal advantage;
o Responsibly use and control assets and other resources employed or
entrusted to my supervision;
o Maintain professional skills and share knowledge with my peers and
subordinates to enable me to carry out my assigned responsibilities
and obligations;
o Not improperly or fraudulently influence, coerce, manipulate, or
mislead any authorized audit or interfere with any auditor engaged in
the performance of an internal or independent audit of the
ServiceMaster financial statements or accounting books and records;
o Report questionable accounting, internal accounting control, auditing
or fraud matters, or allegations of non-compliance with this Financial
Code of Ethics to management. If I do not feel that any such issues
raised have been resolved appropriately, I will report my concerns to
any member of the ServiceMaster Board of Directors, or by using the
Compliance Helpline as provided in the ServiceMaster Code of Ethics and
Business Conduct; and
o Be accountable for my actions and decisions. I acknowledge that failure
to adhere to this Financial Code of Ethics or to the ServiceMaster Code
of Ethics and Business Conduct may result in disciplinary action, up to
and including termination.
- --------------------------------- ----------------------------------
Signature Business Unit
- --------------------------------- ----------------------------------
Name Date
- -----------------------------------------------------
Title
NOTE - A signed copy of this Financial Code of Ethics for each of the applicable
employee, as listed above, must be returned by regular mail or facsimile to
Sandy Groman with the ServiceMaster Legal Department, 3250 Lacey Road, Suite
600, Downers Grove, IL 60515 (Fax: 630-663-2020).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>14
<FILENAME>exh31-1.txt
<DESCRIPTION>CEO CERTIFICATION
<TEXT>
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jonathan P. Ward, certify that:
1. I have reviewed this annual report on Form 10-K of The ServiceMaster Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 15, 2004
/s/ Jonathan P. Ward
--------------------
Jonathan P. Ward
Chairman and Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>15
<FILENAME>exh31-2.txt
<DESCRIPTION>CFO CERTIFICATION
<TEXT>
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Ernest J. Mrozek, certify that:
1. I have reviewed this annual report on Form 10-K of The ServiceMaster Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 15, 2004
/s/ Ernest J. Mrozek
--------------------
Ernest J. Mrozek
President and Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>16
<FILENAME>exh32-1.txt
<DESCRIPTION>CERTIFICATION OF CEO
<TEXT>
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to Section 1350 of Chapter 63
-------------------------------------------------------------------------------
of Title 18 Of The United States Code
-------------------------------------
I, Jonathan P. Ward, the Chairman and Chief Executive Officer of The
ServiceMaster Company, certify that (i) the Annual Report on Form 10-K for the
year ended December 31, 2003, fully complies with requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and (ii) the information
contained in such Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of The ServiceMaster Company.
/s/ Jonathan P. Ward
--------------------
Jonathan P. Ward
Chairman and Chief Executive Officer
March 15, 2004
A signed original of this written statement required by Section 906 has been
provided to The ServiceMaster Company and will be retained by The ServiceMaster
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>17
<FILENAME>exh32-2.txt
<DESCRIPTION>CERTIFICATION OF CFO
<TEXT>
EXHIBIT 32.2
Certification of Chief Financial Officer Pursuant to Section 1350 of Chapter 63
-------------------------------------------------------------------------------
of Title 18 Of The United States Code
-------------------------------------
I, Ernest J. Mrozek, the President and Chief Financial Officer of The
ServiceMaster Company, certify that (i) the Annual Report on Form 10-K for the
year ended December 31, 2003, fully complies with requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and (ii) the information
contained in such Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of The ServiceMaster Company.
/s/ Ernest J. Mrozek
--------------------
Ernest J. Mrozek
President and Chief Financial Officer
March 15, 2004
A signed original of this written statement required by Section 906 has been
provided to The ServiceMaster Company and will be retained by The ServiceMaster
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>18
<FILENAME>exh99-1.txt
<DESCRIPTION>CORPORATE GOVERNANCE PRINCIPLES
<TEXT>
EXHIBIT 99.1
CORPORATE GOVERNANCE PRINCIPLES
The ServiceMaster Company
(adopted by the Board of Directors October 4, 1996, amended
March 8, 2002 and amended and restated January 30, 2004)
The Board of Directors of the Company has adopted the following
Corporate Governance Principles to assist the Board in the exercise of its
responsibilities to the Company and its shareholders. The Board will continue to
assess the appropriateness of these Principles and implement such changes and
adopt such additions as may be necessary or desirable to promote the effective
governance of the Company.
Purpose
The purpose of these Principles is to describe the manner in which the
Company will be managed by or under the direction of its Board within the
framework of its corporate objectives To Honor God In All We Do, To Help People
Develop, To Pursue Excellence, and To Grow Profitably and for the benefit of its
shareholders.
These principles are intended as a guide. They do not supersede or
replace the Company's Amended and Restated Certificate of Incorporation or
Bylaws, nor are they intended to govern or limit the enforceability or validity
of any action taken by the Company, its Board, or any committee of the Board.
These principles do not impose or impute a higher duty or standard of care for
the Board or any individual director than would otherwise be required by law.
Director Qualifications
1. Number of Members of the Board. The Board shall have at least three
-------------------------------
members in accordance with Article 7.1 of the Company's Amended and Restated
Certificate of Incorporation. The Board shall have the objective of having ten
to twelve members with no more than two members from management. Additional
members may be appropriate from time to time in order to accommodate the
availability of one or more outstanding candidates.
2. Selection of Members of the Board. The Governance and Nominating
------------------------------------
Committee is responsible for reviewing the qualifications of, and recommending
to the Board, nominees for membership on the Board. The Governance and
Nominating Committee shall recommend to the Board guidelines and criteria to
determine the qualifications to serve and continue to serve as a director. The
Board shall strive to have a diversity of gender, ethnicity, culture and race.
Members should in general have skills, experience or expertise in one or more of
the following areas: finance, accounting, information technology, senior
management of a major company, federal or state government agencies or
contracting practices, marketing, strategic planning, human resources, ethical
training, and regulatory and compliance.
<PAGE>
3. Independence Requirements. The majority of the Board shall satisfy the
--------------------------
independence requirements of Article 7.5 of the Company's Amended and Restated
Certificate of Incorporation. Unless otherwise determined by the Board, each
member of the Board other than a member who is an officer of the Company shall,
at a minimum, satisfy the independence requirements under the New York Stock
Exchange listing standards. To be considered independent under the New York
Stock Exchange listing standards, no director may:
a. have a material relationship with the Company (as affirmatively
determined by the Board), either directly or indirectly as a partner,
shareholder or officer of an organization that has a relationship with the
Company; provided, that a director will not be considered to have a material
relationship with the Company if (i) the director is a partner, principal,
counsel or advisor to, shareholder, director or officer of another company that
does business with the Company and the annual sales to, or purchases from, the
Company are less than 1% of the annual revenues of the other company and the
director does not receive any compensation (paid, deferred or otherwise) as a
direct result of such business with the Company and (ii) the director is an
officer, director or trustee of a charitable organization, and the Company's
discretionary charitable contributions to the organization are less than 1% (and
no more than $50,000) of that organization's total annual charitable receipts
(the Company's automatic matching of employee charitable contributions will not
be included in the amount of the Company's contributions for this purpose);
provided, further, that a director will be considered to have a material
relationship with the Company if the director is an officer of another company
that is not a charitable organization and any of the Company's present
executives serves on that other company's board of directors;
b. be an employee, or have an immediate family member who is an executive
officer, of the Company;
c. receive, or have an immediate family member who receives, more than
$100,000 per year in direct compensation from the Company, other than director
and committee fees and pension or other forms of deferred compensation for prior
service (provided such compensation is not contingent in any way on continued
service);
d. be affiliated with or employed by, or have an immediate family member
who is affiliated with or employed in a professional capacity by, a present or
former internal or external auditor of the Company;
e. be employed, or have an immediate family member who is employed, as an
executive officer of another company where any of the Company's present
executives serve on that other company's compensation committee; or
f. be an executive officer or an employee, or have an immediate family
member who is an executive officer, of a company that makes payments to, or
receives payments from, the Company for property or services in an amount which,
in any single fiscal year, exceeds the greater of $1 million, or 2% of such
other company's consolidated gross revenues.
An immediate family member includes a director's spouse, parents,
children, siblings, mothers and fathers-in-law, sons and daughters-in-law,
brothers and sisters-in-law and anyone (other than domestic employees) who
shares the director's home.
2
<PAGE>
No director will be considered independent until a period of three
years (or any shorter period provided under the New York Stock Exchange listing
standards) has elapsed from the end of the relationships described in
subsections (b)-(f) above.
The Company will disclose in its proxy statement the Board's
determinations regarding the independence of each director.
4. Committee Independence Requirements. Each member of the Audit and
-------------------------------------
Finance Committee, Compensation and Leadership Development Committee and
Governance and Nominating Committee shall satisfy the independence requirements
and membership criteria set forth in its respective charter.
5. Ethics and Conflicts of Interest. The Board expects all directors,
-----------------------------------
officers and employees to act ethically and adhere to the Company's Code of
Conduct. The Board will not permit any waiver of any ethics policy for any
director, executive officer or other member of the Company's senior management.
If an actual or potential conflict of interest arises for a director, the
director shall promptly inform the Chief Executive Officer and the presiding
director.
6. Retirement Age, Term Limits and Evaluation of Director Performance. Each
------------------------------------------------------------------
director must be younger than the age of 70 at the date he or she is elected to
the Board. Subject to the Company's Bylaws, the Board shall have the authority
to make exceptions to this policy under circumstances to be determined by the
Board. The Board does not believe it should establish term limits. The
Governance and Nominating Committee shall regularly and timely evaluate the
performance of individual directors.
7. Significant Change in Status. If a director has a significant change in
-----------------------------
professional or personal circumstances, such as through a change of employer,
retirement, a change in job responsibilities or health, the director should
tender his or her resignation to the Board. The Board shall then determine
whether such change in status makes accepting the resignation desirable.
8. Service on Other Public Company Boards. A director who also serves as an
--------------------------------------
officer of the Company shall not serve on more than two other boards of public
companies and other directors should not serve on more than four other boards of
public companies. No member of the Audit and Finance Committee may serve on the
audit committee of more than two other public companies. A director should
advise the Chairman of the Board and the Chairman of the Governance and
Nominating Committee prior to accepting an invitation to serve on the board of
another public company.
Director Responsibilities
1. Duties. In meeting its responsibilities, the Board shall act as a whole
------
or through a committee. The basic responsibility of the directors is to exercise
their business judgment in good faith to act in what they reasonably believe to
be the best interests of the Company and its shareholders. Each director is
expected to be familiar with the Company's business, to review in advance of
meetings the materials distributed and to attend and participate in meetings of
the Board and meetings of any committee of which such director is a member. The
specific duties and responsibilities of the Board include, among other things,
fostering a continued
3
<PAGE>
understanding and implementation of the Company's
corporate objectives; representing the interests of the Company's shareholders
in maintaining and enhancing the success of the Company's business; overseeing
and interacting with senior management with respect to key aspects of the
business including strategic planning, succession planning and management
development, operating performance, shareholder returns and budgets and adhering
to the Company's Code of Conduct.
2. Board Meetings. The Board shall meet at least four times annually at
---------------
such locations as the Board or its Chairman shall from time to time determine. A
special meeting of the Board may be called by or at the request of the Chairman
or a majority of the Board. Each Board meeting shall be opened with a devotional
thought relating to the recognition and application of the first objective of
the Company to the operation of the business.
3. Agendas. The Chairman shall be primarily responsible for planning
-------
agendas for a period of at least 18 months in advance with the objective of
having the Board and its committees informed with respect to material and
relevant matters relating to the operation and future direction of the Company.
Agendas are distributed in advance to each director. Any director may request an
item to be added to an agenda. With respect to each regularly scheduled meeting
of the Board, the Board through its Chairman shall determine the agenda of the
Board meeting.
4. Distribution of Materials. The Board and its committees shall be
---------------------------
provided with appropriate materials in advance of each meeting, whenever
feasible and appropriate. Management shall be responsible for ensuring that the
materials are accurate and contain all material information necessary for the
director to make an informed decision.
5. Executive Sessions and Presiding Director. At each meeting of the Board,
-----------------------------------------
the non-management directors of the Company shall meet in executive session
without the Company's management. In the event one or more non-management
directors is not independent, then only independent directors should meet in
executive session at least once a year. In the event the Chairman is not
independent, the Board shall select the chairperson of the Audit and Finance
Committee, Compensation and Leadership Development Committee or Governance and
Nominating Committee to preside at its executive sessions, without management. A
presiding director should serve as such for no more than two consecutive years.
The duties of such a presiding director include advising the Chairman of matters
discussed in executive sessions without management, where appropriate, as well
as on Board agenda items and information to be provided to the Board.
Alternatively, each time the Board holds executive session without management
the Board may select the chairperson of the Audit and Finance Committee, the
Compensation and Leadership Development Committee or the Governance and
Nominating Committee to preside. The name of the presiding director or the
procedure for selecting the presiding director shall be disclosed in the
Company's annual proxy statement. The Company shall also disclose in its annual
proxy statement a method for interested parties to contact the presiding
director, or the non-management directors as a group, directly.
6. Position of Chairman of the Board. The Board shall elect from its
------------------------------------
members a Chairman who may also be the Chief Executive Officer of the Company.
The Chairman shall schedule and call Board meetings, prepare the agenda for
Board meetings, chair and moderate Board meetings, lead the Board and serve
Board committees.
4
<PAGE>
7. Strategic Review. The Board shall regularly review the strategic
-----------------
direction and initiatives of the Company.
8. Stock Ownership. Each director and member of senior management is
----------------
encouraged to maintain ownership of the Company's common stock. The Company's
stock ownership guidelines require each director and member of senior management
to hold a number of shares equal to 50% of (i) the vested shares of restricted
stock and (ii) the number of option shares granted to the director and member of
senior management after providing for payment of the exercise price and taxes,
in each case granted on or after July 17, 2003 until the director leaves the
Board or the member of senior management ceases to be employed by the Company.
All purchases and sales of the Company's common stock by a director and member
of senior management must comply with the Company's Policy Regarding Insider
Trading and Confidentiality.
9. Loans. The Company shall not directly or indirectly extend or maintain
-----
credit, arrange for the extension of credit or renew an extension of credit in
the form of a personal loan to or for a director or executive officer. An
extension of credit maintained by the Company on July 30, 2002 is not subject to
this prohibition provided there is no material modification or any renewal of
such credit on or after July 30, 2002.
Board Committees
1. Committee Structure. The Board shall have an Executive Committee, Audit
-------------------
and Finance Committee, Compensation and Leadership Development Committee and
Governance and Nominating Committee. After considering the recommendation of the
Governance and Nominating Committee, the Board shall designate one person to
serve as Chairman of each committee. The Board shall establish such additional
committees as it deems necessary or appropriate.
2. Committee Charters. The Executive Committee may act on behalf of the
-------------------
Board between Board meetings. Each of the Audit and Finance Committee,
Compensation and Leadership Development Committee and Governance and Nominating
Committee shall have its own charter approved by the Board. Each charter shall
set forth the purposes, duties and responsibilities of the committee.
3. Frequency and Length of Committee Meetings. Each committee through its
-------------------------------------------
Chairman shall determine the agenda, frequency and length of the committee
meetings consistent with its respective charter. A report on regularly scheduled
and special committee meetings shall be made at each regularly scheduled meeting
of the Board.
Director Access to Management and Advisers
Each director shall have access to the management of and advisers to the
Company. Each director shall use his or her judgment to ensure that any such
contact is not disruptive to the business operations of the Company. The Board
and its committees, as set forth in their respective charter, shall have the
right to consult and retain independent counsel and other advisers, as they
determine necessary or appropriate to carry out their duties, at the expense of
the Company.
5
<PAGE>
Director Compensation
The Compensation and Leadership Development Committee shall recommend to
the Board the compensation of members of the Board who are not employees of the
Company in accordance with the policies and principles set forth in its charter.
The Compensation and Leadership Development Committee shall consider that a
director's independence may be jeopardized when a director's compensation
exceeds customary levels, when the Company makes substantial charitable
contributions to organizations in which a director is affiliated, or enters into
consulting contracts with (or provides other indirect forms of compensation to)
a director. Directors who are employees of the Company shall not be eligible to
receive compensation for service as a director of the Company.
Director Orientation and Continuing Education
Each new director shall participate in a director orientation program
within a reasonable time after the director is first elected to the Board. The
orientation program shall be designed to familiarize new directors with the
Company, its management structure and operations, and key operational, financial
and other issues. The orientation program shall include a visit to the Company's
offices to meet with senior management and visit local branches. Each director
should, through seminars, conferences and similar events, remain current in
matters relating to governance, disclosure, accounting or industry developments.
CEO Evaluation and Management Succession
The Compensation and Leadership Development Committee shall review and
approve the corporate goals and objectives of the Chief Executive Officer. The
Compensation and Leadership Development Committee shall annually evaluate the
performance of the Chief Executive Officer in light of the Chief Executive
Officer's competencies, corporate goals, objectives, potential and such other
considerations as the Committee deems appropriate and determine the Chief
Executive Officer's compensation based on such evaluation. The Compensation and
Leadership Development Committee shall conduct a review of succession planning
and make a report annually to the Board, including plans for interim succession
for the Chief Executive Officer in the event of an emergency or the retirement
of the Chief Executive Officer.
Evaluation of Board and Committee Performance
The Governance and Nominating Committee shall conduct annual evaluations of
the performance of the Board and its committees. The evaluations shall serve as
the basis for a discussion of Board and committee performance.
6
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>19
<FILENAME>exh99-2.txt
<DESCRIPTION>AFC CHARTER
<TEXT>
EXHIBIT 99.2
AUDIT AND FINANCE COMMITTEE CHARTER
The ServiceMaster Company
(adopted by the Board of Directors June 9, 2000,